Quote from misha7:
I completely understand point d) and have no problem with it. I think this set-up has it's advantages, but not in volatile markets. When the rates are moving rapidly no other retail trader will be holding the bag - its up to the much dsliked market-makers (referred to on this forum as 'bucket shops") to provide liquidity.
SK: Yes, but with the traditional retail model you only have one market-marker providing liquidity - so you are stuck at the whims of one entity. With an ECN model, such as IB's, you have multiple market-makers providing liquidity and you have other clients providing liquidity.
The point that your liquidity providers cant see stop orders is interesting but inconsequential. For example, one of companies claiming to use the ECN model uses Saxo Bank as one of their liquidity providers. Saxo bank is routinely referred to on this forum as a 'bucket shop'. THe fact that they cannot see MY stop order doesn't change anything: surely the company of their size would not be 'manipulating' quotes in view of my position, but their overall exposure. Thus, if they decide to quote 20 points off the market my stop will be taken out regardless of whether I trade directly with them or through IB.
SK: If you are trading with a reputable firm that doesn't engage in manipulative and individual pricing, etc, etc, then it should be fine.
I have no experience with Saxo's FX markets so can not comment on them in particular. However, I can say that if they are a liquidity provider for another ECN, there's probably no point to go with them directly. If you go with them directly, you only get their liquidity. If you go to the ECN then you'll only trade with them when they are at the inside - if they widen their market then they'll likely be another market-maker at the inside.
The main question: WHO IS THE COUNTER PARTY TO MY TRADES remains unanswered. You cannot just say "banks, hege funds, etc..." because surely for every trade I am entitled to know EXACTLY who the couterparty is, i.e. bank A, company B etc. Remember, this is an OTC market, not an exchange.
SK: This question has been answered.
You buy an FX contract at the exchange, you go through a broker, the exchange is the counterparty, on the other side of your trade is a market-maker, retail client, hedge fund or bank, etc. Your recourse for a stop not being triggered or a margin call is the broker.
You buy FX through IDEAL-Pro, you go through a broker, IB's IDEAL-Pro is the exchange/counterparty, on the other side of your trade is a market-maker, retail client, hedge fund or bank, etc. Your recourse for a stop not being triggered or a margin call is the broker.
You buy FX through a an FX dealer ABC company, you go through ABC broker, ABC broker is on the other side of the trade - no matching is done. Your recourse for a stop not being triggered or a margin call is the broker.
Is this specified in the Customer Agreement?
SK: The customer agreement covers does cover FX, Part 7. It's on the website.
I am not saying the ECN model is worse than the traditional one (using your terminology). It's just that there is no 'better'' model by design - every trader has to test out and see what's best for him/her.
SK: I'll ask another question:
Would you trade a future if you were told that there is only one quote provider and only one firm providing quotes? Or would you trade a future product where there were multiple market-participants each competing against each other?
Now, in my view, the later model promotes competition, liquidity ( and liquidity begets liquidity), and results in narrower spreads, and a fairer and more transparent market.
Or from a similar angle.
Take a look at ES March and June futures which would you trade?
What about if XYZ dealer came to you and said, "Forget March contract, come trade June. I'll quote you a 2-sided market, I'll keep it to .15 wide, and I won't charge you any commission.. but I need to know your exact account size, and you can only place a stop if you tell me where it is". Would you trade the March or June?
In the past the FX ECN model has been out of reach of most retail traders. In fact, our original plans were to provide it for our larger clients only, but due to the demand we have opened it to all with a relatively low minimum. Now, ourselves and others are bringing a fairer and more transparent market to the retail trader. ECN models are quite new to the retail trader, so one can expect some resistance - abit like the resistance to electronic trading from the pits. However, look ahead to the future...IDEAL-Pro has improved substantially month by month since we launched it, and there are other good ECN type models out there which are also only going to get more liquid and more tighter. I expect the FX futures to also progress similarly, particulalry for the major $ cross-rates - and hopefully the FX options will gain good traction. Thus, it's going to be alot harder for the old model to keep up, but even these should get better as the ECN models will hopefully force some firms to clean up their acts and abolish predatory pricing, so that only the fairest and most ethical will survive.
Maybe I'm wrong.... time will tell....
