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“As an ECN broker, FXCC provides spreads on all its currencies starting from 0.1 pips with an average on majors varying between 0.4 pips and 0.7 pips,” continues Salem. “Comparing Market Maker models with the ECN model, some of the spreads can reach up to 5+ pips on majors. Tis means that a client is better off $50.00 per one standard contract (100,000.00). Additionally, due to the ‘no conflict of interest’, ECN brokers allow all EAs to trade. Contrary to Market Makers high volume, profitable EAs are more than welcome. In fact, high frequency traders (HFTs) and EAs are one of the key to our own success with this business model. In Market Maker models, these EAs are banned or are given a very high risk categorisation on their books. Depth of the Markets can give a trader or a HFT a true view on where other trading portfolios have placed their pending and current orders. Many market analytic tools depend on this feature to build their strategies and analyse trends and predict price action models,” Salem concludes.
EA’s, Add-ins, Level II pricing and market depth are tools among many others that, if used correctly, can help traders maximize performance, claims Droguett. He says Dukascopy Bank’s Jforex platform allows
traders to run any strategy or custom-made add-in based on Java, and to provide access to market depth. “While developing their strategies, traders can utilise the market depth as an additional resource, providing information about the current market,” he notes. “Te special option for placing of Bids and Offers to the market allows traders to act as a liquidity provider by placing individual bids and offers directly to the market. As Bids and Offers are placed, they can be matched by other liquidity consumers, thus avoiding the spread costs.”
Pricing issues
On how traders can exploit increased price volatility experienced in an ECN trading environment, Tovmasyan states: “Traders are able to utilise EAs to take advantage of these fluctuations to engage in high frequency trading. Traders need to be extra sensitive about the latency between their trading station and the broker’s ECN server. It is recommended to use a VPS service or co-location to maximise the potential of these strategies.”
Liquidity in an ECN is provided by a number of sources, usually global banks, states Xydas. As each bank has its own book to manage, it can change the pricing and size of liquidity that it offers in an ECN. “Tis leads to greater volatility during news times, as banks tend to widen spreads just before major news events or during the night when liquidity is low,” explains Xydas.
“A trader first of all needs to know that such events happen, and so design his trading strategy and execution tactics accordingly. If a trader is using a strategy of trading the news he must design such strategy having in mind that spreads may widen, so he must design his take profit/stop loss orders accordingly so that he doesn’t get stopped out accidentally in an order that is proving profitable had not the stop out been triggered,” notes Xydas.
Samantha Roady
“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,”
One of the major differences between ECN brokers and traditional type brokers is the filtration of prices, says Salem. He states that ECN brokers could have volatility over one minute up to five times the volatility on the same pair within the same minute with a Market Maker. Market Makers provide this filtration in order to eliminate traders taking advantage of mini spikes that range around five to10 pips on average. “With ECN brokers, predicting these spikes or using a very well written HFT or EA, traders can take advantage of such trading conditions that could only be provided through a true ECN broker.”
october 2011 e-FOREX | 165
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