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an ECN a trader can see the entire depth of all the liquidity providers that are connected to that ECN. For small orders this may not make much difference, but for a $20 million order, the trader must be able to see if he can execute such an order and how much of the order book they will fill by placing that order, as well as the price that the order will be executed. Level II pricing helps the trader decide if they will place a market order or a limit order. If there is sufficient depth and the prices offered for such depth are acceptable to the trader, then he can place a market order to be filled instantly. Otherwise, he will need to place a limit order and wait for the order book to build at that price,”
Mushegh Tovmasyan
“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.”
retail ECN sounds great; access to unlimited liquidity from multiple institutions, super tight spreads, fast trade execution, no conflict of interest, and the rest. However, it’s not guaranteed that the retail ECN offerings available today offer significant advantages for most retail traders over the direct offerings available from the large, regulated retail FX brokers.
“For sophisticated retail traders who think they would be better off trading on an ECN, it’s important to compare ECNs to regular broker offerings in five areas: liquidity; spreads; execution, tools and services; and safety of funds,” she says.
She continues: “Retail ECNs are only as good as their liquidity relationships. Terefore, it’s important to choose a provider that can provide you with access to a deep pool of liquidity to ensure your ability to see and trade on tighter spreads than you would see on a retail platform.”
Improving investment performance
On the question of how retail traders can use FX ECN platforms to improve their investment performance, Xydas comments: “I will start by Level II pricing. In
164 | october 2011 e-FOREX
Xydas continues. “Most of the ECN environments that are offered to retail traders do not offer expert advisors (EAs), as most EAs were and are developed for the Metatrader platform which is mostly a Market Maker solution. So if a trader wishes to use EAs he may need to trade on MT4 or MT5 rather than an ECN. As the use of automated trading increases (50% of volumes executed by clients of FxPro are through the use of automated trading or EAs) ECN brokers will have to provide such solutions. FxPro launched cTrader ECN in April 2011 and we are fast developing a solution to allow clients to write and use EAs.” Tovmasyan adds that MetaTrader provides a very flexible programming language to integrate news and third party market data into automated trading strategies. “Traders can then use MetaTrader to execute via ECN venues via brokers such as Alpari. Our MT4 Pro accounts are integrated into ECN liquidity and execution via a highly optimised bridge developed in-house.”
Aligning interests
Perhaps one of the greatest benefit of ECN platforms is that the interests of the broker and the client are aligned, comments Tovmasyan. He says the broker provides all the tools available to facilitate a client’s trading, and orders via ECN platforms are routed to the best price provider in the liquidity pool which is comprised of top tier banks and hedge funds. “It is possible for one order to go to one bank and the next to another bank,” he adds. “To the trader this means that no single price provider receives all of the trades, essentially masking the trading strategy. Tis facilitates the usage of high frequency and news trading.” For ECN brokers, the accessibility to real market conditions are unlimited, states Salem. “Te main difference between the two models is the ‘no conflict of interest’. As ECN brokers work based on volume generated through their platforms, they strive to
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