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liquidity providers and their stronger risk management programs is a way for brokers to make a transaction- based revenue stream on that scalping flow, rather than risk capital and P&L handling the scalping flow with a ‘principal’ desk model.”
Originally a lot of the high frequency traders were using retail platforms to beat up on the liquidity providers but, says Leahy, there has been a realisation that the relationship is an important aspect in FX trading and one that requires more transparency. “Tat relationship could be obfuscated by layers of technology but retail traders are becoming more demanding in terms of latency and want to cut out as many ‘hops’ as possible. Tey no longer want to be going through a tier three broker, then a prime broker, then another prime broker and this has made the ECN market more attractive.”
Improvements to the automated trade processing systems and greater use of liquidity bridging solutions have helped traditional dealing desk brokers to deliver speedier pricing and trade executions too, says Leahy, who admits that it is a an area of discussion that could take days to complete. “Simply put, an ‘agency’ business model for a broker, in which the brokerage pushes through all client order flow to an ECN offers a better return on equity for the owners of brokerage firms. Te agency business model requires less capital to operate, generates a more reliable stream of revenues, and better ties costs to revenues.”
Retail futures brokers are also taking steps to provide high performance direct market access (DMA) platforms and tailored services to accommodate high frequency traders with strategies dependent on ultra- low latency. “At oneZero we have seen an increasing trend in brokers looking to co-locate their clients, trading platforms, bridging and liquidity all in one location,” says Ralich. “Where simply offering ECN or STP Execution was a differentiation for MT4 brokers in the past, clients are now demanding not only direct to market trading, but also competitive latency in their execution times.”
According to Layth Sanjaq, acting managing director and head of back office at Cyprus-based forex broker FXCC, the need for speed among retail traders is a result of the rising HFT techniques. “Tey are based on identifying and seizing trading opportunities within seconds. Terefore, the execution speed could be the determining factor of the success or failure of those techniques.”
162 | january 2012 e-FOREX Layth Sanjaq “Traders are realising that the ECN trading
environment is the only one in which they can employ scalping or HFT techniques successfully, which makes retail ECN platforms more popular.”
When it comes to these traders’ choice of FX trading platforms, Sanjaq believes that messaging protocols are an influential factor. “Different trading platforms are based on different messaging protocols, FIX-Protocol based platforms are the fastest and most reliable for HFT because FIX was designed to communicate financial messages specifically. Web or Mobile phones are extra tools provided to give traders easy access to the Market, but they can’t be used for high frequency trading due to the connectivity and reliability issues.”
ECN trading
High frequency traders are also migrating to retail FX ECN trading platforms in ever higher numbers, says Sanjaq. “Traders are realising that the ECN trading environment is the only one in which they can employ scalping or HFT techniques successfully, which makes retail ECN platforms more popular. We don’t expect the shift to ECN platforms to take place overnight, but we can see that this is where the retail FX market is heading.”
For the traditional dealing desk brokers, the use of liquidity bridges is often cited as a potential way to
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