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>>> Two basic broker services
George Xydas, director of international operations at FXPro, comments: “Tere are two basic services offered by FX brokers. Te first is a service whereby a broker makes a market in currencies, and the second is the broker providing an agency service. In the first instance, the broker has to provide a constant price and liquidity flow at which clients can trade, and charges a spread between the bid and ask price. If pricing is not competitive and liquidity is not sufficient clients will be swift to change service provider. Te provider must also have sufficient capitalisation to be able to accept the increasing client volumes and must have a good risk management system to be able to hedge its exposures with the broker’s prime brokers.”
“In the second instance, the broker provides an environment through which different Market Makers, be it banks, hedge funds or other liquidity providers provide the price and liquidity flow. In this environment the broker provides an agency service and charges an agency fee such as commission,” says Xydas.
Xydas continues: “Te retail trader has to carefully review the terms and conditions of each broker and the environment it offers to fully understand how each environment works. Usually the trader has to compare the bid-ask spreads offered by the Market Maker to the spreads offered in the ECN, plus the commission charged by the ECN broker. In addition there are different types of orders that can be placed in each environment, as potentially there are different leverage and margin requirements. So it is up to the trader to decide which conditions better meet his or her needs before making a final decision where to go. At FxPro we offer both environments and we have tried to make both offerings as similar as possible, using our relationships with global banks, as well as implementing technological solutions that allow the trader to use either environment.”
Key factors to consider
Tere are three factors that should determine whether a retail forex trader should transition to an ECN Broker, states Mushegh Tovmasyan, global head of sales at Alpari (UK). Te first is minimum trade size. “Historically banks have been reluctant to process small ticket transactions and that is why ECN brokers have implemented a minimum trade size for their ECN accounts. Advances in technology now enable many ECN brokers to allow mini lot trading (10k notional value) and micro lots (1k notional value).” Tovmasyan says the second reason is trade commission. He explains: “Traders should consider
162 | october 2011 e-FOREX
George Xydas
“Usually the trader has to compare the bid-ask spreads offered by the Market Maker to the spreads offered in the ECN, plus the commission charged by the ECN broker.”
the total cost of the trade and not only the spread. To give you an example: $50 per one million commission charge is equal to 1 pip spread markup on a round turn trade.”
And finally, Tovmasyan points to latency. “Te benefit of ECN execution is that trades are executed at available market rates. If there is latency between the client and the broker’s server, the trade might get executed at different rates from what was requested because markets can change in the time it takes for the information to reach the server.”
While Joan Droguett, research, monitoring and brokerage officer at Dukascopy Bank, enthuses: “In our current highly volatile market, I can easily say there are only advantages in choosing an ECN broker. Apart from the dramatic difference in available liquidity, having Market Makers compete to offer their best prices can only be an advantage to the retail trader, provided they are not penalised by any order size limitations. For retail traders, micro lots are also a must, and any worthwhile ECN would make sure their execution is on par with the execution of institutional traders.”
A note of caution
However, Samantha Roady, Chief Marketing Officer, GAIN Capital, warns: “On paper, the concept of a
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