Discussions on new traders

[Shakone]

To my audience: I really apologise for Shakone comment. Please note I have reported it to the moderator.

Cheers

Your 'audience' will be pleased.

 

[Purple Brain]

Yes, based on the discussion I hope to have enough data for a qualitative report for the retail traders benefits in the forum.

With respect Magos, even if you only reflect that which other members provide you and add no bias (hidden or otherwise) of your own, you'll have a 'report' which nobody on the brokerage side of the industry will be interested in reading, let alone consider implementing and everyone this side of the industry - retail traders - will be left wondering why you took so much time and effort to state the obvious.

 

[Magos]

With respect Magos, even if you only reflect that which other members provide you and add no bias (hidden or otherwise) of your own, you'll have a 'report' which nobody on the brokerage side of the industry will be interested in reading, let alone consider implementing and everyone this side of the industry - retail traders - will be left wondering why you took so much time and effort to state the obvious.

Thanks for the message Purple Brain.

The report will be testing if indeed retail FX traders want consistently the same things, what are those features and how can we help them get them.

The summary is not just a copy paste of what people write here but an interpretation of traders answers after they are analysed by me.

So if retail traders still want the obvious for example 5 features it means that they are not evolving as a cluster to a more advance state i.e. they do not learn or engage more.s

All the answers are collected as a form of discussion but I am also personally interested to help people get an insight to the industry, for example malaguti answer on price correlations post.

 

[Purple Brain]

The report will be testing if indeed retail FX traders want consistently the same things, what are those features and how can we help them get them.

Who are the 'we' to which you refer?

 

[Magos]

Who are the 'we' to which you refer?

starting from me, and everyone who wants to participate in the discussions; that is why is in the forum.

 

[Purple Brain]

starting from me, and everyone who wants to participate in the discussions; that is why is in the forum.

Ah, I understand now. Your interest is simply in discussion rather than as any part of a specifically focussed initiative to bring about real change in the way brokers offer services and the types of facilities offered.

While there’s absolutely nothing wrong with discussion, - indeed it is what these forums are all about - I think it was your use of the word ‘report’ and several allusions you made to doing something about bringing about that which you are constantly summarising that gave the impression of something with a bit more clout than chit chat – however useful and entertaining I am sure we all find that to be.

 

[Magos]

Ah, I understand now. Your interest is simply in discussion rather than as any part of a specifically focussed initiative to bring about real change in the way brokers offer services and the types of facilities offered.

While there’s absolutely nothing wrong with discussion, - indeed it is what these forums are all about - I think it was your use of the word ‘report’ and several allusions you made to doing something about bringing about that which you are constantly summarising that gave the impression of something with a bit more clout than chit chat – however useful and entertaining I am sure we all find that to be.

As you understand, I can only initiate a movement Purple Brain, not a change!

Thanks for all your comments, and note that my discussions are not commercial of any nature and my aim is always to educate.

 

[Purple Brain]

Magos, completely irrelevant to me whether you're commercial or not. I enjoy your posts and welcome quality education from anyone willing to offer it.

If you were commercial/broker/vendor that would be a welcome sign that someone in a position to ask - and then listen to and understand retail traders' perspectives might be going some way toward offering a better service that the current baseline. Always to be welcomed.

 

[Magos]

A Message to everyone out there , feel free to ask anything regarding retail trading and you will get an answer for sure.

 

[Hate2Lose]

Question: What are new traders looking for in a BROKER/DEALER especially for FOREX and CFDs.


I would appreciate to get your inside on this guys.


Examples can vary such as: segregated accounts, margin, stop-out levels, education, etc.

I always look for pricing. Direct Market Access is important to me (or as close as can be) – for example, access to bank liquidity for Forex (e.g. a Curranex-type stetup). With equity CFDs, L2 with DMA is important, as is access to liquidity pools – BATs, LSE and the others… Names escape me now…

It seems to me that, these days, they all offer segregation, competitive margin, stops, education etc.

 

[Magos]

I always look for pricing. Direct Market Access is important to me (or as close as can be) – for example, access to bank liquidity for Forex (e.g. a Curranex-type stetup). With equity CFDs, L2 with DMA is important, as is access to liquidity pools – BATs, LSE and the others… Names escape me now…

It seems to me that, these days, they all offer segregation, competitive margin, stops, education etc.

Direct Market Access is important to me (or as close as can be) – for example, access to bank liquidity for Forex (e.g. a Curranex-type stetup)

Currenex, Integral and First Derivatives are very widely used in the retail broker/dealer market. As a retail trader you will never get the rates a broker/dealer gets. They will add markup's for sure. Usually paid as a commission or mark-up on the spread. You should be calculating round turns if you want to assess the broker/dealer and average spread. Currenex, Integral and First Derivatives are acting as ECN getting pools of liquidity, usually the more the better...or if a broker/dealer is offsetting a lot of volume in the market it will by default have very good spreads from LPs.

With equity CFDs, L2 with DMA is important, as is access to liquidity pools – BATs, LSE and the others… Names escape me now…

DMA on CFDs are not a lot of brokers out there, but brokers usually on CFDs keep the risk, because offsetting is expensive i.e. buying share by share. Even if they say DMA it does not mean they offset the positions immediately to the markets; note that CFDis a very leverage product and it costs money to have such big margins as a broker/dealer.

 

[Magos]

Day 5 - Summary

retail traders care mostly about:

1. ECN model is needed in the retail broker/dealer industry. People like to trade with market, not the broker.
2. The same stands for DMA, people prefer to trade with the market and not the broker.
3. Retail traders, are angry with regulation and very upset about the use of limited or non-regulation on retail brokers/dealer; but still do not know advantages versus disadvantages. Might dedicate a day on this.
4. Retail traders want to learn more and more about the industry; I understand this every day now. Broker/dealers…… looks like they are hiding behind their true model.

 

[NVP]

think of them like bookmakers .........then you understand the motives and games played to make a living ....

 

[Magos]

Maybe I can elaborate on the notion of a bookie.

A simple bookie model:
A bookie takes bets from people, he gets prices from statistical models i.e. usually external sources. And then, the bookie is faced with 2 choices, either to take the bets from people or send the bets to other bookies and share some profits i.e. it can be in the form of profit share, commissions, etc.

RFED simple model:
When it comes to RFEDs (Retail Foreign Exchange Dealers, using NFA/CFTC definition), have similarities to the above model.

The RFED gets prices from the interbank market usually through his ECN, pricing up the spread/or commissions to make sure he makes some money (usually called risk free profitability) to cover his costs. Then when retail traders trade, he has the option to accept or pass the trade to the interbank market. But in this case the NFA/CFTC then comes and puts constrains.
ANC for example; Adjusted Net Capital. Requiring the RFED not to take trades on his book if he has not enough capital to pay the trader. Then by default the RFED needs to send the trades to the interbank market i.e. his ECN because as a market-maker should be providing tradable prices at all times.

The difference between risk management in a bookie and in an RFED model is that with the RFED model the company's have more choices on how to manage their exposure i.e VAR, EVT, ES, etc. due to the nature of the OTC market.

 

[Hate2Lose]

Direct Market Access is important to me (or as close as can be) – for example, access to bank liquidity for Forex (e.g. a Curranex-type stetup)

Currenex, Integral and First Derivatives are very widely used in the retail broker/dealer market. As a retail trader you will never get the rates a broker/dealer gets. They will add markup's for sure. Usually paid as a commission or mark-up on the spread. You should be calculating round turns if you want to assess the broker/dealer and average spread. Currenex, Integral and First Derivatives are acting as ECN getting pools of liquidity, usually the more the better...or if a broker/dealer is offsetting a lot of volume in the market it will by default have very good spreads from LPs.

With equity CFDs, L2 with DMA is important, as is access to liquidity pools – BATs, LSE and the others… Names escape me now…

DMA on CFDs are not a lot of brokers out there, but brokers usually on CFDs keep the risk, because offsetting is expensive i.e. buying share by share. Even if they say DMA it does not mean they offset the positions immediately to the markets; note that CFDis a very leverage product and it costs money to have such big margins as a broker/dealer.

Yes, ECNs are the most transparent – you’ll pay a comm, but you’re not working against a book so it’s worth it. There’s no such thing as a free lunch or comm-free trading!

I know Accendo Markets and IG Markets do DMA CFDs. Both use L2 Dealer – you see the underlying market, which does match exactly with other L2 data sources I have. You see your order go onto the market and add to/take out the liquidity, so I’m pretty sure it’s offset to the markets immediately

 

[Magos]

ECN, you end up sending your trade to another broker or a big bank, again depending on the bank relationship with your Prime Broker, there is always counterparty risk. For a bank to collapse like LEHMAN for example is more rare than an unregulated broker!
It does not mean though that the market will move, because the LP might take trade and internalise it!

Broker/dealers though advertise ECN, but still do not offset in the market! most of them!

That has pros and cons; for example/
Pros, faster execution than real ECN, less slippage and trade acceptance rate.
Cons, counterparty risk i.e. a broker/dealer defaults and not pay, manipulation of trades and bigger slippage.

DMA on level 2, prices will not move a lot if the product is very liquid like Google for example or might not move at all. If people are looking to move markets then DMA. Also yes trustworthy brokers are the best.

 

[Magos]

Day 6 - Summary

retail traders care mostly about:

1. Transparency, the broker/dealer should say in simple words how he makes his money and if possible how much.
2. Counterparty risk, can the broker/dealer pay? Stating that the model is ECN is not enough! The Broker/Dealer should guarantee the payments i.e. contractual obligation. Even if the broker/dealer defaults, the segregated client funds should be returned to the traders. This accounts for both regulated and non-regulated brokers/dealers.
3. More sophisticated retail traders, start to use tools such as Level 2 (depth of the market), care about execution and how they can influence markets. This shows clearly that retail traders can learn, and want to learn more.

 

[DitterPD]

The difference between risk management in a bookie and in an RFED model is that with the RFED model the company's have more choices on how to manage their exposure i.e VAR, EVT, ES, etc. due to the nature of the OTC market.

I'm not familiar with all abbreviations, can you please translate them or provide a link where I can see these definitions? And the DMA one.

Day 6 - Summary

retail traders care mostly about:

1. Transparency, the broker/dealer should say in simple words how he makes his money and if possible how much.

They can say/claim, but it doesn't mean they do/follow.

 

[Magos]

I'm not familiar with all abbreviations, can you please translate them or provide a link where I can see these definitions? And the DMA one.



They can say/claim, but it doesn't mean they do/follow.

L2 = Level 2, means it shows market depth. So all orders are in a limit order book so you see how deep is the book i.e. how liquid (how much volume).

DMA = Direct Market Access; a good definition from wikipedia below:

http://en.wikipedia.org/wiki/Contract_for_difference
Direct market access (DMA) was created in response to concerns that the price in the market-maker model may not match that of the underlying instrument. A DMA CFD provider guarantees that it will do a physical trade on the underlying market to match each CFD trade on a one-for-one basis. The contract is still between the traders and the CFD provider but through this method it is guaranteed that the CFD price is the same as the underlying price and that they will not be re-quoted. They will also be able to see their order in the underlying physical market order book. DMA only works where the underlying instrument can be readily bought and sold in the quantities that match the CFD and is most commonly used for shares CFDs. DMA CFDs can be more expensive as the CFD provider needs to cover the exchange transaction fees and may not be able get economies of scale by netting client orders together. The DMA model is much more like a traditional broker model and is preferred by professional and institutional traders as it avoids conflicts of interest with the CFD provider.

BATS and LSE are exchanges: broker/dealers usually use the feeds to provide prices to their traders. If broker/dealers need to trade with market then they will use or be a registered broker for example in the UK:
http://www.londonstockexchange.com/...m-directory/member-firm-directory-search.html

links on bats/lse:
http://www.batstrading.com/
http://www.londonstockexchange.com/home/homepage.htm

 

[Magos]

Day 7 - Summary

retail traders care mostly about:

1. Abbreviations and models such as ECN, DMA, NDD, OTC, etc.
2. How do brokers make money? Can they state clearly their model?
3. CFDs, how are they traded, they are not OTC and they are exchange traded products.
4. DMA, do I trade with the broker/dealer or with the market?