Forum on trading, automated trading systems and testing trading strategies
Something Interesting in Financial Video August 2013
Sergey Golubev, 2013.08.25 15:16
81. The Role of the Retail Forex BrokerBefore the internet, very few individuals traded foreign exchange as they could not get access to a level of pricing that would allow them a reasonable chance to profit after transaction costs. Shortly after the internet became mainstream however several firms built online trading platforms which gave the individual trader a much higher level access to the market. The internet introduced two main features into the equation which were not present before:
1. Streaming Quotes: The Internet allowed these firms to stream quotes directly to traders and then have them execute on those quotes from their computer instead of having to deal over the phone. This automated trade processing, and therefore made it easier for firms to offer the ability to trade fx to the individuals and still be profitable.
2. Automatic Margin Calls: What is not so obvious but what was perhaps even more key is that the internet allowed an automated margin call feature to be built into the platform. This allowed firms to accept cash deposits from clients instead of having to put them through the process of signing up to trade via a credit line. As we discussed in our last lesson it is very difficult to get a credit line to trade FX and for those who do it is a lot of paperwork and hoops to jump through before they can begin trading. This would have made it impossible to offer FX trading to smaller individual traders as the cost involved in getting them set up to trade would not be worth it.
As the electronic platform allowed clients to deposit funds and then automatically cut them out of positions if they got to low on funds, this negated the need for credit lines and made the work to get an individual account open well worth it to the forex broker from a profit standpoint.
If you don't understand all the ins and outs of margin at this point don't worry as this is something that we are going to go into much more detail on in a later lesson.
For now it is simply important to understand that what these firms did was take all the traders who were not big enough by themselves to get access to good pricing and routed their order flow through one entity that was. This allowed these firms access to much tighter pricing than would otherwise have been possible which was then passed along plus a little for the brokers to the end client.
So now you can see why although the forex market has been around for a relatively long period of time, individuals have only started to trade the market over the last few years.
Anther key thing that it is important to understand here is that the larger a firm gets in terms of trading volume, the greater access that firm has to tighter prices and liquidity and the more likely that firm is to be able to pass on better pricing and execution to their clients.
Forum on trading, automated trading systems and testing trading strategies
Sergey Golubev, 2013.07.01 06:59
Just something about ECN and STP - The Truth about Currenex Brokers :
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What is an ECN?
ECN is a term often used when referring to Currenex. ECN stands for
Electronic Communication Network and it eliminates the function of a
third party in the execution of orders. Without the intercession of a
third party, market participants of any size can interact directly for
Bid and Offer prices posted by other market participants. This leads to
greater transparency and narrower spreads. ARCHIPELAGO, purchased by
the NYSE in 2006, and ISLAND are two well known ECNs.
What is an ESP?
ESP™ means Executable Streaming Prices and is offered through the
Currenex system. Currenex connects to multiple sources of liquidity,
primarily banks, who offer "pools of liquidity". This expansiveness
from the multiple pools of liquidity, available through Currenex’s ESP,
provides better price discovery and narrower spreads for traders.
The prices that are offered via Currenex are executed directly within these various pools of liquidity. Whereas in the past, a trader would be required to obtain a Prime Brokerage relationship with one or more of the major liquidity providers which required a very high threshold and associated high expenses.
Not all Currenex Brokers are the same.
It is important to remember that a broker’s Currenex offering is only as good as the liquidity sources that are linked to the platform. The quantity and quality of liquidity sources can lead to dramatic differences in price spreads. For instance, a broker offering 1-2 banks versus a broker offering 8-10 banks will have a dramatic difference in pricing and liquidity.
What is STP?
STP, or Straight Through Processing, is a term commonly used among Forex
brokers.Many Forex brokers state they use "interbank pricing" but act
as a counter party to their customers’ trades. They take the other side
of the trade, going against the client’s best interest, and make money
on a client’s losing trade.
Conversely, a true STP setup passes the order in an automated way to all
liquidity sources. With a true STP broker, there is not the
possibility of any adversarial relationship between the broker and
client as the broker only generates revenue in the form of a commission
per trade rather than the dealing desk model of capturing client losses.
Please suggest me a good book in these areas:
and How does a broker work?