Lot size, slippage and execution speed for non-major forex pairs

[quatron]

Guys, let's be honest. There's no real market in FX. There's only a counterparty or marketmaker. Be it your bucket-shop broker, a regulated broker like Oanda or their liquidity provider. There's someone that takes another side of your trade. And they are doing it for a reason - because they win on average. There's no difference whether your trade was internalized by your broker or a bank which they passed your trade to. If your broker passed your trade to a bank or most likely a non-bank liquidity provider which is a wholesale bucket-shop, your trade is still with a counterpaty / market maker. There's no other way, sorry.

The only brokers which send all order flow to someone else (they market it like ECN, STP, or agent model) are the ones who are under capitalized or can't market make for some reason. No one would let go of a good chunk of their revenue at will. It's just business. Internalizing the flow gives about a double revenue. Think about it this way - by passing your order to another agent your broker pays the spread and commissions charged by that agent. Believe me, every broker dreams of internalizing most of they flows, not all can afford it though. And then the ones who can't came up with this myth that market maker model is bad. True, unregulated market making is not going to be honest but big names in the market who are there for years will do everything reasonable to make you a happy customer.

As for Oanda their spreads are not competitive now, there are other names on the market which are as respectable but more competitive. There's a reason why their spreads are wider than most other brokers, they want to attract easy customers. There was a topic here recently on percentages of winning customers - Interactive Brokers has 45% winning but Oanda just 33% each quarter.

Also on your points:

1. Oanda is far from top of the list with their spreads, just check any broker comparison web site.
2. At 33% winning rate per quarter they must have a high churn so new traders are their bread and butter.
3. Almost all regulated brokers are willing to listen, with a few exceptions. I understand that you had a good experience with Oanda but your comment sound like there's not many brokers you can trust.

I second your last comment. It's all good while it's all good. They say you know who your true friend is in times of hardship.

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Yes (no commissions, just the spread).





I don't know. They certainly used to, when I was there. It's normal for counterparty market-makers in spot forex to charge "no commissions, spread only", and it's what all their customers expect. The average account-size is tiny.





This is definitely right.

Oanda's spreads used to be about the most competitive one could find (among brokers with that business model, I mean).

My understanding now - i.e. several years later, and this is all impression from second-hand information only - includes three things:-

1. They're not quite as competitive as they were, overall, but still pretty clearly among the top 5%/10% of such brokerages for spread-sizes;

2. Their spreads are also slightly more variable now than they used to be, but only a little, and at times that will only really be a problem to dedicated "news traders" (and among retail spot forex traders, news traders tend to have only a very limited survival-span anyway, so that's perhaps not too relevant!);

3. Unlike many/most "brokers" of this kind, they're actually willing to listen to their customers and to correct obvious mistakes - for example, if their chart shows a spike which stopped out a customer, at a time when their competitors' charts didn't have any spike (this is a pretty common cause for complaint among retail spot forex traders) they're often willing either to cancel or even to reinstate the trade, "for the goodwill". In this murky industry, that's pretty unusual.

Again, those last three points are second-hand information only, not my own personal experience of dealing with Oanda (which was better, overall, but is now possibly out of date).

I think the third of those three points is actually the most important one. You find out "what your broker's really like" only when something goes wrong.

 

[Xela]

There was a topic here recently on percentages of winning customers - Interactive Brokers has 45% winning but Oanda just 33% each quarter.

That's not comparing like with like: IB is a genuine/DMA brokerage, and Oanda is a counterparty market-maker.

A better comparison would be between Oanda and other counterparty market-makers, and Oanda generally emerges well from that comparison ... which was rather my point!

There's no real market in FX. There's only a counterparty or marketmaker.

There are certainly some independents trading spot forex via Interactive Brokers (to name but one) who'll be rather surprised to hear that, and wondering what they're doing for a living!

Sorry, I don't mean to be rude or hostile to you, but your statement is simply factually inaccurate, i.e. mistaken.

 

[alexander1994]

The only brokers which send all order flow to someone else (they market it like ECN, STP, or agent model) are the ones who are under capitalized or can't market make for some reason.

From what I know so far I'd rather say that not chosing the market maker model has the major benefit that there is no conflict of interest. The broker is happy if you make money (and obviously you yourself are happy if you make money). Both the broker and the client have the same goal. Maybe you then have to let go of some of the profits, but having chosen a non market maker model is, at least in my mind, beneficial in the long run.

 

[quatron]

There are independents making a living trading with market making shops as well, not sure what was your point. By real market I mean something like futures or equities. Where you can see what's bid and offered and where other participants traded. Where you can see your own trade on the tape. Where all participants use the same marketplace. It's not the case in FX.

Almost all forex brokers are running a hybrid model where they are a counterparty to a part of their clients and send the flow they don't want to internalize to wholesale dealers. Those dealers are your counterparty if your broker is externalizing your flow. Simply speaking, every trade you win is a loser for them.

And IB is no different. They advertise their IDEAL platform as "ECN-Like" and nowhere you will find that they run a pure agency business. According to those guys (http://www.forexscamalerts.com/interactive-brokers-forex-review) IB is a counterparty to some of their clients (just as all other hybrid brokers).

I'm very surprised to hear that Oanda is competitive on spreads and execution costs. Just look here - https://www.oanda.com/forex-trading/markets/recent. The minimum spread was 1.2 pips for EURUSD. You can get as low as half a pip with other regulated brokers. It's a massive difference.

No offence taken, a lot of people don't fully realize how the FX market really operate due to its complexity and non transparency. I'm just trying to be helpful here.

That's not comparing like with like: IB is a genuine/DMA brokerage, and Oanda is a counterparty market-maker.

A better comparison would be between Oanda and other counterparty market-makers, and Oanda generally emerges well from that comparison ... which was rather my point!





There are certainly some independents trading spot forex via Interactive Brokers (to name but one) who'll be rather surprised to hear that, and wondering what they're doing for a living!

Sorry, I don't mean to be rude or hostile to you, but your statement is simply factually inaccurate, i.e. mistaken.

 

[quatron]

The conflict of interest is a very good point. However, as I outlined above most brokers run a hybrid model. It works this way. A broker is a counterparty until they noticed that a client knows what they are doing. At this moment the client is switched from a "counterparty" pool to "STP" pool. From that moment on it's just as you said, the broker and the client have the same goal.
The only reason why this hybrid model is there is that most clients don't really know what they are doing or just gambling and being a counterparty pays off.

From what I know so far I'd rather say that not chosing the market maker model has the major benefit that there is no conflict of interest. The broker is happy if you make money (and obviously you yourself are happy if you make money). Both the broker and the client have the same goal. Maybe you then have to let go of some of the profits, but having chosen a non market maker model is, at least in my mind, beneficial in the long run.

 

[alexander1994]

Almost all forex brokers are running a hybrid model where they are a counterparty to a part of their clients and send the flow they don't want to internalize to wholesale dealers. Those dealers are your counterparty if your broker is externalizing your flow. Simply speaking, every trade you win is a loser for them.

Are you referring to the interbank market here when speaking about wholesale dealers or is there a difference? Because at the end of the day, in a true ECN model the interbank market is where the trades are sent I think (which I referred to as the real market earlier in this thread). I am asking because up to now I am not sure whether the banks taking the trades is basically the same situation as with a market maker broker.

 

[quatron]

The way brokers use the word interbank is misleading. Interbank is the platforms where banks and big institutions trade. Minimum trade size there is usually $1M. Retail brokers are not using those platforms as they need to trade small size to be able to STP customer trades. So they use banks (their market making desks) or non-bank dealers who aggregate trades and hedge on interbank what they want to hedge.
Some institutional platforms have those dealers in their stacks (e.g. EBS). So if a broker uses EBS to STP their flow to a wholesale dealer they can claim that they trade on interbank.

Or is Currenex interbank? They are not an exchange, they are an institutional broker. They can tailor liquidity for your broker needs and source quotes from whomever you want. So depending on how you ask Currenex to configure their broker platform you can trade with banks or those same dealers.

Hope it helps.

 

[quatron]

On your last question - the banks taking the trade is not the same situation.
The advantage of this is that that generally there is no conflict of interest as banks are not seeing who is trading and how much equity a trader has. Some wholesale dealers require a broker to tag each trade so they see who trades, they are typically non-bank dealers. In this case the conflict of interest is with the dealer. There's no way to tell if your broker uses such a dealer unfortunately.
Disadvantage is that your trades will get slipped more. There's an added delay in communication between your broker and their dealer. This is more pronounced with stop orders. A marker maker would fill a stop order at the price you put an order at. An STP broker would request the price from a dealer which will be different from what you requested. So trading scalping and momentum strategies is more profitable with a market maker.

 

[Xela]

So trading scalping and momentum strategies is more profitable with a market maker.

Why would a market-maker keep a successful scalper on his books? He'd be the party being scalped, wouldn't he? DMA brokers welcome successful scalpers, naturally, for the huge commissions they generate; market-makers understandably not so much.

 

[quatron]

You're right, I should have said make more with market-maker until you are noticed and get switched to STP if successful. At least you get that holiday period
Most trades are not successful as we know so market-maker will be ok with them.

Why would a market-maker keep a successful scalper on his books? He'd be the party being scalped, wouldn't he? DMA brokers welcome successful scalpers, naturally, for the huge commissions they generate; market-makers understandably not so much.