Jason Rogers
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Hi Mike,
Thanks for your post and I'm happy to help answer questions and have a discussion. The questions you're referencing are not tough questions, they're loaded questions intended to mislead forum members. You only have to take a look at a few of the claims to see the pattern. Below are some examples:
There are no re-quotes when trading with FXCM, and the statement is simply made up without providing any proof.
If you visit the FXCM.co.uk website (or FXCM.com for US clients), the term DMA isn't even mentioned. Next I'll be hearing that FXCM claims to have invented forex trading. The things that try to get passed off as fact without providing any evidence are absurd, and not worthy of a response. Earlier this year Steve stated regarding the forum rules that:
Again I'm happy to have a discussion, but if completely false claims are made about FXCM, they will be disregarded.
Now on to your question asking for a detailed response. FXCM offers No Dealing Desk (NDD) forex execution, and I would be happy to explain for you step by step how NDD works and how it is different from your typical market maker broker.
1. Pricing: In the NDD model, FXCM acts as a price aggregator. We take the best available bid and best ask prices from 10+ liquidity providers, add a mark-up, and then the best price is streamed onto the platform. FXCM has no control over pricing, since it's determined by competition between the liquidity providers with our compensation just being the pip mark-up. Having multiple liquidity providers also ensures that no one provider can manipulate pricing. In a dealing desk model, the broker is the sole provider of pricing. They may look at the wider market as a reference point for their pricing, but pricing is ultimately set by the market maker who has an interest in seeing you lose if they choose not to offset your order.
Let's take a look at how the NDD pricing process works using a simple example involving 2 banks and prices quoted only to the whole pip (4 places past the decimal point). Below are 2 banks quoting GBP/USD pricing:
FXCM takes the best bid from Bank B of 1.6169 and the best ask from Bank A of 1.6170 which make the best spread 1.6169/70. We then add a pip mark-up to the bid/ask making it 1.6168/71 which is what you see streamed onto the platform. This competitive process constantly takes place as new quotes are received.
2. Execution: In the NDD model, every order is offset one-for-one with one of the 10+ liquidity providers. I'll give an example continuing with Bank A and Bank B pricing from above. Let's suppose you decide to buy GBP/USD at the price 1.6171. The order is first sent to FXCM to buy at 1.6171 and FXCM in turn executes an offsetting transaction with Bank B at the price 1.6170. You have a long position at 1.6171 and FXCM has a long position at 1.6170 with Bank B thereby hedging the traders exposure. Our compensation was the 1 pip mark-up between the price you requested 1.6171 and the price which the order was offset with Bank B, 1.6170.
With a dealing desk broker, the broker may choose not to hedge trader positions. This means a traders profit becomes their loss and the loss becomes their profit presenting a conflict of interest.
Let's take a look at how the NDD pricing process works using a simple example involving 2 banks and prices quoted only to the whole pip (4 places past the decimal point). Below are 2 banks quoting GBP/USD pricing:
Bank A: 1.6168/Bid, 1.6170/Ask
Bank B: 1.6169/Bid, 1.6171/Ask
Bank B: 1.6169/Bid, 1.6171/Ask
FXCM takes the best bid from Bank B of 1.6169 and the best ask from Bank A of 1.6170 which make the best spread 1.6169/70. We then add a pip mark-up to the bid/ask making it 1.6168/71 which is what you see streamed onto the platform. This competitive process constantly takes place as new quotes are received.
2. Execution: In the NDD model, every order is offset one-for-one with one of the 10+ liquidity providers. I'll give an example continuing with Bank A and Bank B pricing from above. Let's suppose you decide to buy GBP/USD at the price 1.6171. The order is first sent to FXCM to buy at 1.6171 and FXCM in turn executes an offsetting transaction with Bank B at the price 1.6170. You have a long position at 1.6171 and FXCM has a long position at 1.6170 with Bank B thereby hedging the traders exposure. Our compensation was the 1 pip mark-up between the price you requested 1.6171 and the price which the order was offset with Bank B, 1.6170.
With a dealing desk broker, the broker may choose not to hedge trader positions. This means a traders profit becomes their loss and the loss becomes their profit presenting a conflict of interest.
This entire process from start to finish is detailed in this video:
There was a suggestion made that it's better to trade on a commission-based pricing structure via an API with market depth information. In fact, this is one of the options we offer to Active Trader accounts. Interestingly though, the majority of them still choose to have their commission built into the spread as a pip markup similar to how we have it on retail accounts for simplicity. In the end, it comes down to personal preference. Whether the commission is charged separately or as part of the spread, it's a cost that has to be covered in order for a trade to be profitable.
FXCM does not manipulate prices. Our regulators required a change to our system in 2010 regarding positive slippage, and all FXCM clients can experience positive slippage even while many of our spread bet competitors may not offer it. An easy way to check is whether your limit orders are ever filled at a better price especially if the market price gaps through your limit.
If you are truly concerned about manipulative pricing, then I would think you would be leading the charge against brokers that re-quote. A dealing desk broker could selectively use re-quotes in their own best interest instead of treating all trades the same. Here's an example which will make it very clear how re-quotes work in the interest of brokers that use them.
Suppose there's a major news event that has the ability to move the market substantially within a matter of seconds, and you're trading GBP/USD. The current price is 1.6160, but the market gaps to 1.6180 and continues moving higher immediately when the news is released. If you buy and happen to get 1.6160 then the broker is stuck holding a short position at 1.6160 for a 20 pip loss and growing!
If it happens only a few times, then no big deal, but if the broker continues to get picked off like this, you're hurting their bottom line. This is when you are most likely to be hit with a re-quote for the "correct market price" of 1.6180. What happens if you decide to sell instead? In that case, you sell at 1.6160 and the market immediately moves to 1.6180 resulting in an immediate profit of 20 pips for your broker. The dealer looks like a trading genius. Why re-quote the better price of 1.6180, you got exactly the price you wanted. So you can see how re-quote practices are often one-sided in the market maker's favor. As mentioned previously, there are no re-quotes at FXCM.
Jason
