The main types of retail forex brokers

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What they are and how to find a good broker.

The retail forex business can be as opaque as the market itself is, only a tiny fraction of private traders have an idea of ​​how the transaction process goes, whether orders are brought to the market and many other subtleties for which general knowledge is not enough. Today we will discuss common models of retail forex broker functioning, basic terminology, as well as many things that brokers hide and do not want you to know about them. Actually, there are quite a few articles like this on the Internet, but most traders are not interested in this topic. Therefore, I am posting this article here to bring light to the masses and open your eyes to things that many do not notice. Of course, some of you will not find anything new here, but for many, I hope this information will be more than useful.

The price (value) of the transaction is of great importance for us, traders, since usually money seems to fly out of the pipe and in most cases it is rather difficult to find the reason for this. This is the main reason for the massive abandonment of ECN accounts and the transition to other, fixed tariffs without additional fees and commissions.

The bottom line is that no trader should pay more than 1 pip commission on a regular trade, say EUR / USD, during a standard trading session. And yes, it is on ECN platforms that include fees. If this is the case that applies to your trading, then you are still enriching your broker. Whatever one may say, but this is the scheme by which your hard-earned money can easily be transferred to someone else through one small trading operation. Such a transaction value (more precisely, your costs per transaction), of course, may be fair if you receive high-quality analytical material or analysis tools from a broker, but in most cases this is not the case, I will say more – professional analytics and tools can be obtained for much less money than what you give to the broker.

Standard retail forex broker models and why everyone hates them

Retail brokers, as a rule, are divided into several categories (models), in some cases, combinations of models are used to work with more whimsical clients. For example, within one firm there may be 70% B-model, 20% A-model and 10% C-model. Such terms and designations are used in the forex industry, I have not invented anything new. Just focusing your attention on these details, many do not know this. So now I think you can talk about each model in order:

A-Model: The broker makes a profit only due to the spread. Trades are transferred to the bank by providing direct access to the market, or via ECN to the bank. You will never hear from me a recommendation to trade using a system that is even a drop different from the A-model. The technology of organizing trade in this case is well developed and accessible to everyone, so I see no reason to deal with something else. In addition to excellent order execution, you no longer have to deal with the frequent trading restrictions that are quite common in other models.

B-Model: The most common model, for good reason, of course. One glance at the order book of clients of such a retail broker and the reasons for profitability become absolutely clear: the term “hedging” is filled with new meaning, the broker opens trades as opposed to the client, in other words, plays against traders, drives them out of the market and takes the spread for itself. It should be added that this “flexibility” is a clear conflict of interest between the broker and the client (more on this below). Current reports from the Federal Futures Trading Agency show that approximately 70-80% of the volume of transactions of private traders are negative (loss). Most retail brokers use the B-model because it is very profitable. The largest brokers in the United States have historically followed the B-model with ” good ”results (almost a century!). Clients tend to be frowned upon by B-models, but brokers often lure them into providing unique flexible terms of cooperation. The main stumbling block, of course, is the conflict of interest and how long brokers have been capitalizing on their clients with this model.

C-Model: More confusing and obscure, it can only be noted that it does not fall into the first two categories. The C-model consists of many strategies designed to balance profits in such a way that both the broker and the client are satisfied.

Aggregation of Liquidity

Retail brokers will collect liquidity from a vast array of major destinations and channels. A long time ago, the only way out for a retail forex broker was to establish a connection with a bank or several banks, and concentrate this liquidity on their platforms. The broker could choose the delivery channels, essentially doing what market makers are doing today. Nowadays, there are many methods of obtaining liquidity – on a turnkey basis from several sources or organizing direct access through ECN platforms. The only thing that remains unchanged is the bank’s services for the maintenance and management of accounts, as well as the control of many operational functions.

Liquidity aggregation is becoming more and more accessible these days due to the expansion of the number of market participants (brokers, traders, funds). This allows brokers to be more flexible and expand their horizons, thereby providing even more favorable conditions for traders of all categories. Ultimately, the market improves, becomes more transparent, and retail traders have more options and freedom than ever before.

As established to date, retail brokers will have access to liquidity through the following means:

  • Direct relationship with the bank: A single banking platform or other access to the banking system will allow brokers to generate broad liquidity channels.
  • ECN: A relationship with a large bank is usually required due to the broker’s lack of credit.

Now is the time to understand and remember the basic terms that we still need:

ECN: Electronic Communication Network. ECNs have grown significantly in volume over the past few years and are likely to continue to grow, because they have many advantages, let’s highlight the main ones:

-Direct access to liquidity: You have access to a bank / other trader / financial institution, in a word, to everyone who participates in price formation.

-Deep liquidity: Prices and quotes are abundantly sourced from large firms and can be provided to special clients.

-Access to the order book: Market participants’ orders are in the public domain. Application information may vary depending on the selected ECN.

– Brilliant performance: follows from the previous paragraphs. It should be borne in mind that in some cases there will be the presence of “last resort”, which implies the opportunity to gain an advantage in trading.

Retail brokers usually advertise ECN platforms, but this does not mean that these platforms are really real. True ECNs give you direct access to the intrabank market, where the broker charges you a commission on top of your spread, which can in turn be returned. Many ECN platforms known in the retail forex industry can pose risks to the client. These are not real ECNs, but only their semblance, they have clearly marked spreads, but at the same time, the risk of spread reversal is a real problem for brokers. Here is a list of the main institutional ECNs: Currenex, FXAll, Hotspot, LMAX, etc.

ECN broker allows you to trade directly with other market participants. You are essentially trading ECN with the rest of the world, including banks, hedge funds, other traders like you and other participants. However, be aware that some ECNs are only good with the platform you are using, so be careful with your software choice.

A market maker who is responsible for a few basic functions

Forms prices for you, that is, for clients. These prices are most often “reflections” of the real market price, and sometimes your trades do not even leave your broker’s server. The market maker stands on the other side of your position, you sell, he buys and vice versa, in this case it does not matter what model your broker, it can be both A and B. If you are an A client, then from time to time your trades will be sent to the market, in which case you will become a problem for someone else. Sometimes it becomes a serious problem in terms of order execution, in particular, if your trade hops between several servers, this may be due to the use of old routing technologies.If you are a B client, your broker will have an unshakable confidence that sooner or later you yourself will pour your money into it.

Most retail forex brokers act as market makers, a model that can be called a market-forming model. It is still very common and gives the broker almost limitless opportunities to perform the most dastardly tricks, more professionally speaking, the behavior of a broker using this model is extremely unethical towards the client. Here is a small list – a delay in the execution of a client’s order, ignoring trading conditions and an increase in the spread in the area of ​​accumulation of stop orders. These are just a few examples of the “special” abilities of the broker hidden behind the market-forming model. To be honest, this is a ubiquitous practice. Unfortunately for us, even financial regulators are unable to track such fraud. If you don’t want to become a victim of such actions, just stay away from this model.

Everything that was described above is illegal and illegal, no matter which side you look at, but, nevertheless, this does not stop many brokers from continuing to do this. Those who are caught doing such things usually become targets of highly professional and serious agencies, for example, the NFA.

More and more brokers are getting into trouble for using and following a market-forming model. It goes without saying that not all market makers are playing unfairly, following the A-model is the least chance of you bumping into a bad broker.

Private traders are gradually becoming more savvy in these matters, and of course, are opposed to uncontrolled trading conditions. And it’s no secret that brokers come up with various methods and services to lure inexperienced traders aboard.

DMA: Direct Market Access – Direct Market Access. The name speaks for itself. As a trader, you have direct access to the interbank market. This entails an agreement to accept the price, or to form it through many counterparties who have access to the platform. This function is usually used in conjunction with the ECN model.

STP Straight Through Processing – Streaming Processing. – Another way around which there is a little hype, it gives some information, not all of course, about which model your broker is following. Streaming indicates that your trade goes through a broker directly to a liquidity provider. The easiest way to distinguish an STP broker from an ECN broker is to be aware that the STP broker is transferring the trade directly to the banks with which it has established relationships. The ECN broker transfers the deal to the real ECN system, where you will have full access to all its participants.

Brokers try to increase the spread in order to benefit from your trading turnover and catch up with the lack of a B-model in your account. They want you to be profitable so you can continue to cover fees, but it’s incredibly difficult to do with transaction prices so high. Some cheats are so “outstanding” that it’s hard to believe in them. How do you like this “courtesy” of the broker – you are charged money for the fact that the broker does not prevent you from completing the transaction.

Some STP brokers have more adequate pricing policies and may not even use markups. Although I believe that there is no normal STP broker that provides fair prices, fast execution of a trade without delays, normal spreads, does not exist. STP brokers are still limited in their actions, because the very essence of a special position and an advantage over you as a client is not fair.

No Dealing Desk: A term widely used in the forex industry. If you see this “function” all over the broker’s page, then you should know that in fact the broker just uses STP. It is possible that the broker directly withdraws your trades, but the possibility of manipulation remains with him.

How to understand what is Market Maker or fake ECN in front of you

– Availability of requotes. In real ECN, you get the market price and you either accept it or you don’t.

– Many types of trading are prohibited, for example scalping, etc.

– Asymmetric slippage. This practice is illegal, when the broker does not allow you to enter at the best price or the price within the spread, so slippage can only be for the worse.

– Lack of market depth. Trading volumes and the number of orders for a certain price must be available to the trader.

– Installation of freeze-levels. Freeze levels are the minimum distances for stop loss or take profit. For example, the freeze level is 10 points, which means if the price approached your take profit or stop loss at a distance of 10 points, then you will not be able to delete or change the stop and profit levels, in other words, your orders are doomed to be executed.

The list is mainly centered around the “features” of market makers who have repeatedly discredited themselves with such things, which is why they now have a tarnished reputation.

Fake ECN or other forms of STP systems are not always very bad, I do not justify them, but it is clear that they are not the best choice for a trader. For most private traders, the trading conditions of such companies are at an acceptable level, however, sooner or later you will face problems or limitations that you would not see on real ECN platforms.

Many people prefer STP over ECN platforms because of the speed of order execution, I myself have heard such statements more than once. The fact is that as soon as you feel the difference in the technical plan of execution, then discussing and finding out who is right and who is not will lose all meaning.

Gaining access

As stated above, most brokers offer some form of direct access to the market, yet they still require you to be a “PRO” client, or use a “Gold” tariff plan. a lot of money on the account, or increase your trading turnover. ”As the foreign exchange market continues to develop and gain momentum, the number of brokers is increasing every day and the forex industry is already packed to capacity with offices that are ready to provide direct access for nothing.

The problem is also developing due to such a cooperation and partnership scheme as a white label provided by the popular Integral or Currenex systems, which, as a rule, have increased requirements. In other cases, there is a scheme in which the accumulated volume of orders is compensated by clients’ orders. Currenex Standard, Viking and platforms like that are becoming available to clients with large deposits at many brokers.

The LMAX is the best example of a new kind of ECN designed to replace the old model of retail market makers. For those outside the US, it only takes $ 1000 to open an account through an Introducing Broker.

ECN is ECN, whether you are an institutional investor or a private trader, you still need someone to store your money and keep statistics, reports and other paperwork. This is where your broker should come to your aid. Many brokers will set a simple commission based on the volume of trading volume in order to earn extra money on the number of your trades. Personally, I do not mind paying commissions of this kind, the main thing is that there is no conflict of interest.

My recommendations

The first thing we pay attention to is the cost of the transaction. Save your money. Each small, seemingly insignificant amount accumulates over time into a rather impressive one. Experienced traders know this, but beginners often ignore this nuance, and it is REALLY IMPORTANT. The broker rating based on the value of the trade can be found here: http://like-to-trade.ru/rejting-brokerov-foreks/

Find out which model your broker is using. Again, many brokers today use the A-model in addition to the traditional B-model. Do you want to get as close to the market as possible for the right money? – Ask the broker directly. If the broker refuses to report his model, you can be sure that the B-model is being used. An A-model broker will not hide information about how your trades are progressing.

Most people are wrong when they ask brokers if they are trading against their clients’ positions. Usually brokers avoid direct answers by praising the NDD function, and then you become a victim due to a lack of knowledge or, as a result, from an overpriced transaction. Therefore, be extremely careful.

If a regulatory agency is watching your broker, this does not mean that he has any problems. Just a couple of weeks ago, the FSA was monitoring one of the largest retail brokers in the world for asymmetric price slippage. This broker has been running his business for many years, and yet such cases are not uncommon. So it’s just worth playing it safe.

What else should be taken out useful from this article

Stay away from fixed spreads. They are simply useless. The broker will work against you as a market maker or use the STP model, which will also only bring you trouble.

There is no perfect platform, no matter who your broker is and what model you use – a market maker, STP or ECN. You need to analyze it yourself and draw the appropriate conclusions.

Try to find the most liquid marketplace with many counterparties and liquidity providers. The whole world of financial services is in front of you. Want to trade and catch spikes? No problem. Want to execute a trade in a few milliseconds? No problem. More liquidity invariably leads to lower spreads, you may not need flexibility in trading today and now, but in the long term it will become an important factor.

If you are aiming at investing amounts more than 10-20 thousand. dollars, your opportunities will expand significantly. Just make the most of them.

Be smart. The choice of a broker should not be a spontaneous decision or based on additional instruments, signals, bonuses or other similar insignificant things, it all looks like a free cafeteria in a casino, you know what it was created for. This is your hard-earned money. Try to keep them.

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