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efficiency because we say so. If you look at what happened in the equity markets in the 1990s, the arrival of true ECNs brought faster executions and new pricing models but most important it brought true transparency and tight spreads. We believe that the FX market is heading in the same direction and that true ECN technology with incentives for traders to post their liquidity in the form of limit orders will bring more retail volume to the market place and reduce spreads to 1/10th of a pip for all pairs.”
Unresolved issues
Fair Trading Technology is a company offering a connectivity bridge between the Metatrading world of home broking solutions and the ECN trading model. As far as McLean Van Cleve, the company’s chief systems engineer, is concerned there are still some
“If you’re transparent you have nothing to hide and if you’re showing everything, it had better be good.”
issues to be resolved in terms of how the ECN model operates in the retail environment. “Te outcry for an ECN model in the FX retail space has its roots in the quest for lower spreads and traders not wanting their brokers trading against them. But it has been introduced with a capital requirement that is often out of the reach of the average guy looking to get into the market.
“Brokers have a very good reason for wanting to be the middle man in the retail world in that they quite simply want a cut of the business from the 90% or so of retail traders that are going to lose money but there are very few brokers out there offering true ECN liquidity and pricing to everyone, regardless of their account balance. Tere are some, as we are discussing in this article, but if the ECN model is going to succeed in the retail market, this is the direction in which it has to head.”
Te retail ECN model will also have to provide the transparency that is so sought after in the retail market. On the retail side, traders tend to view brokers as a necessary evil, says Van Cleve. “Whether it is a legitimate accusation is anyone’s guess,” he says. “What I do know however is that through transparency, one can prove that the standards they brokers advertise are either legitimate or not. If you’re willing to put your money where your mouth is, there’s nothing to hide behind and conversely if you don’t have anything to hide, why not be transparent?”
Recent statistics from US-based FX rates service Oanda show that more transparent liquidity providers and brokerages have a higher percentage of profitable traders, says Van Cleve. “So it’s not hard to connect the dots between these two glaring obvious facts and traders all over the world are drawing the same conclusions. If you’re transparent you have nothing to hide and if you’re showing everything, it had better be good. When your facts are out there for the world to see, they’d better be good and therefore a company will strive to make it so.”
More complexity McLean Van Cleve 128 | april 2011 e-FOREX
Te institutional side, however, is functioning as it always has, says Van Cleve, but there are more complex algorithms coming into play and more complex routes to liquidity being found. “Tis is a very cutting edge market that is blending software and hardware in the quest for microsecond execution speeds.” Speed is becoming an increasing factor in the
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