Truth in Forex: How Your Broker Really Executes Your TradeBy: Lucro Capital Ltd It’s what’s causing a renaissance in Forex now. And the bad history is giving way to new Forex startups that want to break with the old ways and give clients a level playing field. But not everything beneath the surface is changing for the better. From Dealing Desks to Electronic Execution The electronic revolution in Forex was a reaction to the poor practices of old brokers who utilised dealing desks with human dealers working around the clock to “process” client trades. When we say “process,” This was an inherently messy process; you had thousands of trade requests per day that had to be analysed on the fly by dealers and re-quoted or slowed down to prevent “bad traders” from gaming the broker. Instead of dealing desks with human dealers, new brokers touting “electronic execution” and “no dealing desk” just created new dealers in electronic form. Enter the “ECN” broker. In the Forex world, the term “ECN” is a nebulous and varying concept. In truth, it is “an automated system that matches buy and sell orders for securities” as defined by Investopedia. It is an alternative to the market maker system in which a middleman passes trades between two parties. A major Forex broker provides a graphic on their website similar to this one when describing their execution method: 4.bp.blogspot.com/- What they are really doing is more like this: 3.bp.blogspot.com/- What’s going on is the prices clients see in their trading platform are actually ECN prices transmitted from liquidity providers, but by utilizing a liquidity bridge, the broker is able to choose which trades they send back to the liquidity provider (prime broker) and which trades they execute internally (make the market). Now, by itself, there isn’t anything wrong with the broker being the counterparty. It’s how your broker reacts when your trades are profitable and causing the broker to lose money or you are scalping with a very high execution speed. With clients who are utilising scalping strategies it becomes very obvious to them very quickly that their trades are being delayed. So because of this conflict of interest where the broker is still dependent on losing clients, an “ECN” broker without any ability to manage its own risk is just a dealing desk in disguise. Why can’t I just go to a bigger broker? Or use a “prime broker” that’s too big to care if I’m losing? That’s probably a question you’re asking yourself now that you know every ECN broker has their hands on your trades. But the nature of the Forex market is one that necessitates market makers, because the currency market is one without a central exchange, and one that is too big to ever be on one exchange. Even the prime brokers are just bigger version of retail brokers. Prime brokers are just as likely to be market makers. So where do I go? How do I get better execution on my trades and fair treatment? The decentralised nature of the currency market makes it extremely complex. What you have, essentially, are counterparties of varying scopes and sizes trading between each other in an almost infinite web. The only differences in them are the levels of access they provide, i.e. how big of an account and trade size they require from their clients. 3.bp.blogspot.com/- So you might be thinking to yourself, “I should be trying to get an account with that huge broker that provides interbank pricing”. Well, you could. But now you are tied to what is essentially a large market maker who is concerned with generating revenue from commissions or spreads on large trade sizes. Again, you are no more likely to get faster execution or lower spreads 100% of the time. As a client, if your true concern was to receive the best spreads and execution 100% of the time, you would have to open multiple trading accounts at different prime and retail brokerages and trade on all of them. The Hybrid Brokerage and Client Focused Trading There wouldn’t be any reason for the banks to exist if some client didn’t have a reason to place a trade, whether they are trading for business purposes or for speculation. This means that a client should not have to have more than one account at a respectable brokerage, no matter the size of the broker. The main concern for the broker should be being the bridge to the many different execution venues available in the entire market, and passing the client’s trades to whoever is the best at that given moment. 1.bp.blogspot.com/- It shouldn’t matter that your broker isn’t making the most money it can off of your trades. A hybrid model brokerage’s main concern is putting the technology in place to connect multiple sources of prices and liquidity to the client’s trading platform. Contact Details: Lucro Capital Ltd 152, Franklin Roosevelt Avenue 3045 Limassol Cyprus http://hiwayfx.com UK Sales 00443308280893 Cyprus Sales 0035725030942 End
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