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Should you consider using
a Forex ECN platform?
the middle of the bridge, says Layth Sanjaq, head
of operations at FXCBS. On one side, there are the
banks quoting prices into the client terminals through
the broker’s platform. On the other side, there are the
traders (clients) performing trades on those streamed
prices. Each trade goes through the broker’s platform
to the corresponding bank that quoted the price and
gets executed using the liquidity provided by the bank.
To find out if you really are trading on an ECN, says
Ross Ditlove, CEO of MB Trading, there is a very
simple test that can be employed. Ditlove explains:
“Find any currency pair on any broker’s system. For
simplicity, use a pair with a three or more pip spread.
Let’s say the Bid is 100 and the Offer is 103. Now
enter an order to Buy at 101. If you and everyone else
on your broker’s system do not immediately see your
new Bid at 101, thus making the market now 101 by
103, then you are not on a true
ECN. It’s that simple.” Without
displaying your order immediately
or at all for everyone in the system
to see and act on, your broker is
somehow manipulating the quote
behind the scenes, says Ditlove.
“MB Trading’s revenue is generated
from the commission we charge the
retail client, and thus we offer full
transparency without manipulating the
spread or quote,” he continues.
Why DD and NDD?
The reason some brokers now offer both dealing
desk (DD) and non-dealing desk (NDD) FX trading
facilities, says Giuseppe Zagara, managing partner and
the co-founder at Fastbrokers.com, because NDD
I
t is important to first define the
term ECN. Traditionally ECN stands
for Electronic Communications Network,
a term that came from the (then) new
electronic means of connecting to the
NASDAQ market place. Since FX
lacks both a central global exchange
and market handling rules, brokers
have begun to stretch the definition to
ECN to suit their particular systems.
Heather McLean
Forex ECN platforms sound in theory like the ultimate utopian environment for trading. They can
provide a place where orders are matched in real
time in a collective bubble of liquidity provided
by each of the market’s participants. However, as
Heather McLean discovers, there is more to the
world of the ECN than meets the eye.
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What is an ECN?
Vladimir Kisyov, head of business development
at Deltastock, adds to the definition: “The ECN
basically provides a marketplace where individual and
institutional traders, market makers (MM), prime
brokers and banks trade against each other by placing
competing bids and offers, thus generating liquidity
into that electronic system. The ECN environment
allows clients’ orders to interact with other clients’
orders. All trade orders are matched between
counterparties in real time.”
The FX ECN model can be described as a two way
bridge where the broker is the traffic coordinator in
“The FX ECN model can
be described as a two way
bridge where the broker is
the traffic coordinator in
the middle of the bridge”
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because it requires advanced requirements in terms of
technology, an excellent IT infrastructure and can bear
high development costs, he adds.
Changing expectations
“Today, we see a significant change in terms of
clients’ expectations,” Vedikhin points out. “Clients
from all backgrounds, including retail, are becoming
increasingly demanding with regard to the suite of
services they are being offered by their broker. All
traders are now requesting institutional-level execution
speeds, and NDD execution helps us to deliver on
that. While approximately only 5% of retail clients
trade via ECNs today, we expect this to grow to over
95% within the next few years. The benefits of ECN
trading, including transparency, deep liquidity, market
depth and NDD execution, will then become available
to everyone.”
Vladimir Kisyov
“The ECN environment allows clients’ orders to interact
with other clients’ orders. All trade orders are matched
between counterparties in real time.”
is the answer to the growing number of FX traders
demanding more transparent and fair pricing.
He comments: “Retail Forex is today a mature product
and traders understand its logistics (including the fact
that pricing and trades are often handled in a market
making environment). While there are still a few
brokers using ambiguous statements about the nature
of their retail forex system, most brokers are now
offering a variety of trading environments to satisfy
the growing demand of alternative products, often in
place of the classic dealing desk.”
On brokers offering both DD and NDD FX trading
facilities, Kisyov says the number of NDD FX trading
facilities (either STP or ECN-STP brokers) has
notably increased in the last couple of years or so. He
comments: “The shift from the DD to NDD business
model has accurately addressed the growing needs of the
forex trading community for greater liquidity and best
execution, thus explaining the major migration of retail
clients from MMs to ECN-STP brokers. Nonetheless,
the DD model still provides advantages to traders.”
“The logical consequence has been to see brokers
offering an ECN-style environment. However,
few brokers really allow their clients to trade these
products, but simply made a major switch from the
‘fixed’ spread model to a ‘floating’ spread pricing
which they marketed as a ‘NDD’ or ‘multi bank’ feed.
Unfortunately these are merely DD-based systems
which simulate or replicate the floating bid and ask of
a true ECN model, but execute orders on a DD basis,”
states Zagara.
Andrey Vedikhin, CEO of Alpari (UK), agrees that
most brokers would like to be in a position to offer
NDD execution because it allows for a much greater
level of automation when matching trades. However,
NDD execution is relatively difficult to achieve
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Giuseppe Zagara
“..most brokers are now offering a variety of trading
environments to satisfy the growing demand of alternative
products, often in place of the classic dealing desk.”
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Sanjaq continues: “I believe that brokers who are
offering both DD and NDD are actually DD brokers
trying to catch the trend by promoting NDD trading
for their clients. The DD-NDD dilemma is ethical
and can not be taken as a variety of services. Since an
ECN broker’s role is to give individual traders access
to the interbank market, they do not benefit from
the spreads or the losses of their clients. Therefore,
they usually charge a commission fee per transaction
proportional to the trade size. Besides, banks
usually charge the ECN broker commission fees for
transaction executed on their end.”
Wolf in sheep’s clothing?
While Ditlove comments: “This is an example of
a wolf in sheep’s clothing. If your broker does not
immediately display your bid or offer for all other
clients to see, if your broker maintains minimum
fixed spreads, if your broker knows information about
your order that is not fully transparent to the rest of
the marketplace and retail traders alike, then you’re
not getting a fair deal. Just because someone calls
themselves a NDD-ECN does not make them so.
Frankly, it’s laughable.”
Yet the debate about dealing desks and non dealing
desks (NDD) is a red herring, claims Glenn Stevens,
CEO at GAIN Capital. He says as a retail trader, your
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primary concern should be your ability to get into a
trade quickly and at the rate you request, and where
your orders are filled. These things can positively or
negatively impact your trading results; where your
order is ultimately routed does not.
Stevens explains: “Our belief is that NDD’s came
about in response to complaints about the poor
execution quality at some of the retail brokerages.
Promoting themselves as a NDD was a way for
brokers that entered the market late to differentiate
themselves. It’s fairly well known that when the first
NDD firms came on the scene there were several
firms with poor reputations for execution, especially
where they filled their client’s stop loss orders. Also,
some brokers prefer the NDD model because it’s
much easier to take a price feed from a bank, mark
it up to the retail customers, then push all the trades
back to the bank, than to act as a MM and manage
risk internally while providing the best client dealing
experience possible.”
Continuing, Stevens states that GAIN Capital believes
an experienced, professional trading desk is the real
benefit to its retail clients at FOREX.com. “We don’t
have an arm’s length relationship with our clients; we
take full responsibility for the prices we quote and
where we fill orders.”
Conflict of interest
In a pricing basis model, also known as a MM model,
the prices are streamed from data vendors directly
to the client terminals. Clients perform trades on
the streamed prices, but the trades reach a dead end,
which is the MM’s servers. Meanwhile, the dealers
of the MM are trying to negotiate execution for the
favour of the MM and to minimise the profitability
of their clients. Sanjaq states this model creates a
huge conflict of interest between the broker and their
clients, as the loss of the client is considered as pure
profit for the broker.
Andrey Vedikhin
“While approximately only 5% of retail clients
trade via ECNs today, we expect this to grow to
over 95% within the next few years.”
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He states: “As a client trading on MM’s platform,
when you are buying a currency pair, the MM is
your counterparty (selling to you). Therefore, if your
buying order goes in profit of $1000 for example, it
means that the MM is losing $1000. It’s as simple as
that, unless the MM has a risk management policy
that it applies to offset your order with a different
counterparty at a certain point. Slippage and
requotes are techniques used by MMs to minimise
the profitability of the client. Scalping is usually not
allowed by MMs because it gives the client higher
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a day; it’s not feasible that we would or could trade
against individual clients,” Stevens concludes.
Not robbers
On possible conflicts of interest in order execution that
can occur with MMs, Kisyov says: “Market makers
literally make the market for traders. They sell to
buyers and buy from sellers by quoting fixed spreads.
Unfortunately, most of the MMs quote variable spreads
now. Market makers have been growing in number
since the dawn of retail FX. I don’t think they could
have survived if they had robbed clients’ accounts,
especially in this highly regulated environment, where
clients’ interests have been strictly protected.”
Glenn Stevens
“..some brokers prefer the NDD model because
it’s much easier to take a price feed from a bank,
mark it up to the retail customers, then push all the t
rades back to the bank, than to act as a MM ...”
chances of closing in profit few pips away from the
opening price, which is inevitable loss for the MM.”
Vedikhin states that some FX brokers are criticised
by retail investors for having a conflict of interest
when executing client orders; they sometimes have to
become the counterparty to their own clients’ trades.
However, most of this criticism is unwarranted, he
claims, because the majority of clients trade with
brokers that are fully licensed and regulated by various
agencies such as the FSA and NFA. “Regulated firms
like Alpari (UK) must abide by rules regarding best
execution and treating the customer fairly at all times.
This prevents any wrongdoing on behalf of the broker
because regulated brokers are put under immense
scrutiny by their respective regulator,” he says.
Stevens agrees: “One of the biggest myths promoted
by NDD brokers is that DDs are somehow ‘trading
against’ clients. This is hype. At GAIN, we’re a hybrid
model. We offset a potion of our trades immediately
in the interbank market. Everything else is our ‘net
customer exposure’ and managed on an aggregate
basis. We maintain strict position limits and hedge our
exposure in the interbank market as needed, according
to our risk management guidelines. In certain cases,
we may offset customer trades immediately in the
interbank market. We process well over 100,000 trades
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While Jesse Richards, a registered broker and a
principal at Fastbrokers.com, comments: “When the
broker is on the other side of each trade, there is a
conflict of interest as that broker will lose money if the
client profits (if the broker does not hedge its risk),
therefore the broker may be more profitable if the
trader makes bad trades. I believe that the majority of
deals done at NFA-regulated FDMs are done so on an
ethical basis, however there are many unscrupulous
brokers that actively manipulate the price to their
advantage and to the disadvantage of the trader. The
conflict of interest manifests itself in the execution of
orders. The two most common forms of manipulation
Layth Sanjaq
“Scalping is usually not allowed by MMs because
it gives the client higher chances of closing in
profit few pips away from the opening price,
which is inevitable loss for the MM.”
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traders complain about are stop hunting and spread
widening.”
Richards adds stop hunting is the practice of a MM
moving the price to hit a large number of protective
stop orders, even if the price may not have reached
that level through competitive pricing. In this scenario
the MM pushes the price up or down by a few pips
momentarily with the intent of stopping out traders
and booking profits for the dealer. Spread widening is
the practice of artificially widening the bid/ask spread
when accounts are in a profit, to eliminate said profit
or even forcing accounts to incur a loss due to margin
issues, says Richards.
Ditlove says MB Trading holds its liquidity providers
to fairly specific terms that if they are showing a price,
they have to execute a certain amount at that price. He
adds that obviously, there are scenarios such as news
releases where more orders are being fired at them
and they also want to execute less. But compared to
years ago when a deal desk could slip a customer 100
pips because of the non-farm payroll data releasing,
things have come a long way, he claims, adding: “Does
every fill occur on the visible bid and ask at the time
you click the button? Probably not under fast market
conditions, which is no different then an NYSE
specialist who is charged with maintaining an orderly
market.
“That being said, the way to combat this circumstance
is to add more liquidity venues to our system,” Ditlove
continues. “MB Trading is an aggregator of liquidity;
if we find that there is less then optimal liquidity we
add more banks as sources. But that doesn’t change the
fact that our routing algorithms are very fast and our
liquidity provider relationships are fairly deep, so the
system will generally find a way to get a fill in a timely
manner. The main point that I would focus on is that
any slippage that occurs on our system is a function
of global supply and demand, as opposed to a DD
that refuses to give a retail client a fair deal in order to
maximise their own profit.”
ECN settlement
On how the FX ECN model works and how it
operates on a settlement rather than pricing basis,
Richards says because forex is a non-centralised
market, there are two ways for retail traders to access
it; either through a MM offering marked up liquidity
from one or several liquidity providers, or through an
ECN-style system.
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Jesse Richards
“The two most common forms of manipulation traders
complain about are stop hunting and spread widening.”
“Now, it should be noted that while banks, prime
brokers and large institutional traders may operate on
a settlement basis utilising a true ECN environment,
most retail forex ECN style accounts still operate on
a pricing basis even if they are STP, NDD accounts,”
Richards explains. “On a retail forex ECN style system,
while it may operate on a STP basis, the counterparty
to the client’s transaction is ultimately a prime broker,
who is not aware of the identity of the client. Instead,
the prime broker has a credit relationship only with the
broker counterparty, that is, the company you would
normally open an account and deposit your funds with.
Retail ECN models eliminate the inherent conflict of
interest that exists with a MM, but do not truly operate
on a settlement basis.”
Costs and fees to trade on ECNs depend on different
factors, according to Zagara. Generally speaking, he
says the trader is offered an ‘all inclusive’ commission
quote which includes the broker’s profit and fees. The
broker then pays its fees to the prime broker and to the
ECN itself, which charge a transaction or clearing fees,
similarly to futures exchanges. Some of these charges
do not apply to what Zagara considers to be ‘home
made’ ECNs. Also, he notes that while more brokers are
embracing the forex ECN style, we can expect to see a
growing commission battle among brokers, which will
eventually benefit the traders; a similar path that the
electronic futures have followed in the past.
However, Kisyov adds it is the individual trading style
that matters when choosing a trading model, in terms
of the potential impact on trading performance.
“It is always about costs involved and execution
when elaborating on the choice of a
trading model. With variable spreads,
the difference between the bid and
ask prices of a certain currency pair
fluctuates in a range. On the other
hand, fixed spreads are predetermined
under all market conditions.”
Kisyov states that Deltastock’s fixed spread on
EUR/USD is 2 pips, while it goes down to 0.1 pips
in the ECN/STP module. The company has utilised
direct pricing with no mark-up or mark-down from
its liquidity providers, and the only fee that applies for
ECN-STP order execution is 0.3 pips for trades as low
as 10,000 base currency units. So, assuming a EUR/
USD order is executed at 0.1 pips spread, the bottom
line for clients will be 0.4 pips total transaction costs.
MT4 bridging issues
Bringing ECN trading to the retail trader, many firms
offering ECN trading now claim to bridge to the everpopular MT4 platforms. On issues with bridging an
MT4 platform to an ECN, Ditlove says MB Trading
spent more than a year finding out. He states: “The
short version is that MT4 is half a decade old at this
point, and MetaQuotes is busy working on MT5
now. When MT4 came around, there were no ECN
forex brokers. It’s a round plug in a square hole. We
had to meticulously
consider every part of
how MT4’s architecture
worked and strip out pieces
that simply didn’t make sense
in our current execution model.
There are now a lot of brokers
that claim to be FX ECNs with
MT4, but we review what they are claiming and know
that at best, they are simply routing orders out to one
destination and again failing the transparency test.”
Most of the issues are technology related, although
the prime reason for there being issues is because
FX ECN’s and MT4 have vastly different trading
philosophies, says Vedikhin. The biggest challenge, he
warns, is to be able to match client orders from MT4
with liquidity from an ECN. ECN’s show market
depth but MT4 does not, so it is important to resolve
the issue of execution when an MT4 client wants a
trade executed immediately at the best possible price.
“In MT4 it is not possible to provide partial fills, but
ECN platforms often execute client orders at slightly
different prices subject to available liquidity at a
particular price. This core difference in approach can
cause issues when bridging liquidity,” he comments.
Zagara says Fastbrokers.com explored MT4 bridging
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in late 2007, when more clients started to demand a
real ECN execution delivered on the MT4.
Fastbrokers.com concluded that clean bridging seemed
to work only in theory. Zagara says: “It is a very tough
task to achieve in a live environment, mainly for the
nature of the MT4 infrastructure, where its core, in
my opinion, is mainly designed for a dealing desk
usage only. Furthermore, each ECN has is own trading
and order rules, different API specification and FIXcommunication issues. Our tests reported problems
with split fills (which MT4 wasn’t able to handle), off
quotes caused by latency (trades were passed while the
price on the ECN had changed), which made possible
the use of a bridge in a hybrid model but it was not
possible to make it work in a true STP-only model.
“For that purpose we dismissed the MT4-ECN
project and switched to focus our custom software
to fill this gap,” explains Zagara. “I am sure now
things have changed; there are different and more
powerful bridges. However, in my opinion, I am still
very sceptical when I see a broker claiming is offering
an MT4 through an ECN. I would scrutinise both
the bridge and whether the ECN it connects to was
specifically designed or modified to handle MT4-like
platforms, to the extent that the benefits of a regular
ECN may have been compromised to accommodate
the needs of MT4,” he warns.
Ross Ditlove
“There are now a lot of brokers that claim to be FX ECNs
with MT4, but we review what they are claiming and know
that at best, they are simply routing orders out to one
destination and again failing the transparency test.”
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Richards adds: “There have been many challenges
getting this marriage to work. As, in my opinion,
the MT4 software was never really meant to execute
through an ECN. Currenex, through its executable
streaming prices model, is another company making
headway in retail ECN trading. If a broker signs on
with Currenex they will have true STP-NDD accounts
available for their clients,” he claims.
ECN or not ECN?
On what factors may ultimately govern whether a trader
should consider using a forex ECN platform or not,
Zagara states that while some traders, when delivered a
true ECN product, enjoy the liquidity and volatility of
these feeds, they are sometimes quickly overwhelmed
not only by the commission charges, lower leverage,
and higher balance required, but especially with the less
user friendly trading platforms that allow you to trade
on it. Zagara comments: “That reason led us to develop
Pathfinder Trader, which includes trading on different
ECN’s but delivered on a front end with the most
advanced features, such as, powerful charting, auto
execution, back testing, pattern recognition, and any
other advanced functionality you would expect from a
modern trading platform.”
Vedikhin comments: “At Alpari (UK) we believe that
over 95% of forex retail trading will go through ECN’s
within the next five years, but there are some obstacles
in the way. The first is that ECN trading is often too
expensive for the majority of retail traders. Account
opening requirements are usually much steeper
compared to traditional FX trading, while leverage
is much lower. The other obstacle is complexity.
ECN’s often come across as too complicated and
‘institutional’ for retail traders. We believe that over
time ECN trading will become progressively simpler
as users become more informed and educated about
its potential. Cost of entry and complexity are both
obstacles that can be overcome.”
While Ditlove notes: “We would obviously argue
that not using a true ECN platform is at some point
detrimental to the trader, but there are still people who
view it differently. Our goal is to have a transparent
display system that prohibits games, and for some
people that have been around a while, the importance
of that is lost. Can they make the argument that with
a fixed spread, no-commission model it is easier to
know what you’re getting? Maybe. Is it cost effective
and better in the end? I would question whether that
is the case. Simply stated, transparency in a market
place brings efficiency and efficiency brings value.”