New With Questions

Hi Jason,

This week we’ve communicated on the general Brokers forum regarding FCXM vs Oanda.

I’ve seen FXCM described on this site as a NDD broker. FXCM charges commissions. That combination fits my initial understanding for forex brokers.

Oanda is described on this site as a “Registered Foreign Exchange Dealer / Non-Dealing Desk.” Your previous comment insinuated that they are not an NDD, like FXCM. Also supporting that idea is the fact that they charge no commission. Then, how do you explain that “non-dealing desk” attached to their description? I’m suspecting they offer both types of accounts.

Also, is Trading Station platform offered exclusively by FXCM?

Finally, I’m pretty sure that MT4 offers volume indicator, yet you say that Trading Station offers “real” volume indicator which others don’t. Can you explain?

Thanks for your assistance.

Michael

Hello Michael,

I’m not Jason Rogers. But, there’s a reason I’m butting in here. Jason can, and will, tell you all you need to know about FXCM. But, he is probably somewhat reticent about representing the business model of Oanda, and comparing and contrasting it with FXCM.

I’ve never been accused of reticence, so I’ll give you my take on Oanda, and specifically on their business model. Later, you can compare my description of Oanda with Jason’s description of FXCM.

First, we need to talk about terminology.

Labeling forex brokers in a way that clearly describes their various business models is a dicey proposition. Different players in the forex business use the labels (all of them) differently, making fact-based conversation difficult.

Example: Consider the terms “broker” and “dealer”.

[B]Common parlance[/B]

Almost every retail forex trader, myself included, uses the term “broker” to describe [I]any[/I] company that will give us retail access [I]for speculative purposes[/I] to the worldwide currency market. Case in point: A thread here on the forum which I manage is called “Going Offshore to Escape the CFTC”, the purpose of which is to find, vet, and list “brokers” outside the U.S. who will do business with U.S. clients. In the first 4 pages of that thread, we list nearly 350 “brokers” who either are or aren’t offshore brokers, and who either will or will not deal with us. On that thread, we don’t concern ourselves with labeling these companies as either “brokers” or “dealers”. We refer to our list as “The Offshore [I]Broker[/I] List”.

[B]Stricter parlance[/B]

Some authors/teachers/traders, on the other hand, are sticklers for observing the distinction between brokers and dealers. One member of this forum, lexys, has made a point of insisting that ECN brokers are real brokers, and all others are dealers. The distinction being made here is that ECN brokers pass the orders of their retail clients directly to an ECN (electronic communications network) where they are executed, and at no time hold the opposite side of the [I]executed[/I] orders. All other “brokers”, including STP brokers, actually execute client orders in-house, and then offset the resulting positions (or not, as they see fit) with their upstream liquidity providers (banks).

[B]Regulatory parlance[/B]

And finally, there is the U.S. regulator, the CFTC (Commodity Futures Trading Commission), which takes the position (1) that there are [I]no[/I] retail forex “brokers”, and (2) that they [I]all[/I] are dealers, because, unlike true brokers, they all remain “counterparty” to the open positions of their retail forex clients. The CFTC designates all of these companies as Retail Foreign Exchange Dealers (RFED’s), and refuses to use the term “broker”.

Let’s go back to common parlance, for a moment. We commonly refer to all brokers as “brokers”, but we divide them into two broad groups: those who trade against their clients (or have the capacity to do so), and those who can’t (and therefore don’t).

In the [I]trade against us[/I] category, we identify “market-makers” and “dealing-desk brokers”, and we tend to use those terms interchangeably. In the [I]don’t trade against us[/I] category, we identify “SPT brokers” and “ECN brokers”, and frequently we equate those types in recognition of their seemingly more honest relationship with their clients.

The term “bucket shop” is sometimes thrown around by people who want to disparage market-makers. But, these days, the term basically amounts to slander, and those who use that term today know that. The business models of STP brokers and ECN brokers make operating as a bucket shop impossible. Only market-makers could — if they were stupid enough to try — operate a bucket shop, in the actual meaning of the term. A bucket shop is a specific type of scam, prevalent in the early (wild west) days of retail stock trading (prior to the Great Depression), and sometimes seen in the early days of retail forex trading. But, thankfully, bucket shops are non-existent now in most countries of the world.

All of this background brings us to your questions about Oanda and FXCM.

[B]Oanda[/B]

Oanda readily identifies themselves as a market-maker. But, they claim not to be a dealing-desk broker. So, we have to try to understand [I]their[/I] terminology — because, as your questions imply — we tend to think of “market-maker” and “dealing-desk” as the same thing.

On this website page — Online Forex Trading | Forex Spread | Slippage & Latency | OANDA fxTrade — Oanda states:

As market maker, we take our role very seriously and part of this means making our pricing model transparent.

And a little further down, they say:

With OANDA, you can expect:

100% fully automated online trading platform
No dealer desk intervention
No algorithmic software designed to push trades to the broker’s favour
Any price slippage is a result of natural market price fluctuations
No asymmetrical price slippage practices

I think we can assume that Oanda is using the term “market-maker” (with or without the hyphen) to mean the same thing we all understand it to mean: a broker who holds the other side of client positions, and offsets those positions (or an aggregate position in a particular instrument) when, and as, they see fit.

(Most of us think that [I]some[/I] brokers fit this description, and [I]some don’t.[/I] The CFTC, as mentioned above, maintains that this decribes all so-called “brokers”.)

When you take a LONG position in your Oanda account, you automatically put Oanda in a SHORT position, which they may, or may not, offset (hedge) with their bank(s). Whether they offset your position or not, they remain your counterparty in this position.

At this point, red flags go up for many people, who see a conflict of interest between broker and client, and presume that the broker will use their superior position in the market to take advantage of the client. This [I]taking advantage[/I] can take many forms, all of which result in losses for the client, which automatically become profits for the broker. And the mechanism for this [I]taking advantage[/I] is a “dealing desk” — a person, a group of persons, or a computer, which can manipulate the BID price, or the ASK price, offered by the broker, in order to trigger the stop-loss orders of losing clients, converting clients’ paper losses to realized losses, and converting the broker’s paper profits to realized profits.

In the claims made above by Oanda, they are clearly saying that there is no [I]human[/I] manipulation of prices (“No dealer desk intervention”) in order to trigger client losses. And they are further saying that the job of cheating clients has not been handed over to [I]computers[/I] (“No algorithmic software designed to push trades to the broker’s favour”).

So, believe them or not, depending on your own due diligence (research). I think you can be sure that, [I]if those claims are not true,[/I] your due diligence will turn up tons of credible reviews taking Oanda to task for cheating clients, and lying about it. On the other hand, [I]if those claims are true,[/I] as I believe they are, you can be confident that you have found and vetted a broker who operates differently from FXCM (for example), but is every bit as ethical.

[B]FXCM[/B]

Here, I shall defer to Jason.

And I’ll leave the other questions in your post to him, as well.

Apologies for the wall of text, above. I hope that some of it was helpful.

Clint

.

Clint, thanks for confirming and deepening my initial understanding of the different business models. Your quoting of Oanda’s self description is less than a crystal clear definition of their model, of how client’s orders are processed. One thing they clearly do not claim is to be an ECN. Therefore, we can only assume that their quotes are not direct from liquidity providers. And the fact that they charge no commission tells me that they almost certainly must massage their quotes to make profit, at least for the majority of their clients. To me this does not mean that they are necessarily unethical, but it does leave room for concern what could happen.

Much appreciated. I’ll look forward to Jason’s comments.

Michael

Hello again, Michael

I’m not sure why you are confused about Oanda’s business model.

As I mentioned in my previous post, Oanda readily acknowledge being a market-maker. And I also explained that brokers can be grouped into two broad categories: (1) market-makers, and dealing-desk brokers; and (2) STP brokers, and ECN brokers.

Oanda is in category (1), and therefore [I]not[/I] in category (2). Oanda is not an ECN broker.

As a market-maker, Oanda adds a retail mark-up to the wholesale price quotes streamed to them from banks in the interbank network — in lieu of charging a commission on each leg (entry and exit) of each trade. Example (hypothetical): bank quotes a 0.5-pip spread to market-maker; that market-maker adds a pip to each side (BID and ASK), and quotes a 2.5-pip spread to you.

There is nothing evil about the market-maker business model, so long as the market-maker deals honestly with their clients, as I believe Oanda does. The tone of your comments implies great suspicion, on your part, for the market-maker business model. If you can’t be comfortable with a broker who operates such a business model — then, clearly, you should focus exclusively on ECN brokers.

Clint, what is confusing about Oanda is that they themselves claim “no dealer desk intervention” and this site also describes them as an NDD. To my newbie understanding, these descriptions are not appropriate for a market maker. My difficulty may come from not really seeing the difference between an NDD broker and an ECN or SPT model.

The difference is that Oanda matches your orders with other orders of their clients (made by computers, so no physical dealing desk there) and ECN broker send it to the interbank market…

This also means that many times (if not almost always) Oanda doesn’t even take the other side of trades, but another client of them does…this is the only logical way to operate for a market maker…they make the market by providing prices and then they match buyers and seller within their clients…and only if there is no possibility of matching then they take the other side and offset it with their LPs…

I think that people also see “the other side of your trade” in a wrong way…i don’t think that when you open a long position then the broker holds a short for the same time…they just bring buyer and seller at the same price levels at the same moment together…just like stock exchanges, and nobody questions their model…the difference is the OTC (over-the-counter) nature of the forex market…

Mike

This is incorrect.

[B]If Michael goes short[/B] one lot of EUR/USD, [B]and I go long[/B] one lot of EUR/USD, [B]both with Oanda,[/B] then Oanda can, and will, “net out” their [I]exposure[/I] to both our trades.

But, Michael has not transacted business with me.

And I have not transacted business with Michael.

Oanda is still counterparty to both of our positions.

[B]If Michael wants to exit his short position,[/B] by buying one lot of EUR/USD, he can’t exit by “buying” from me. And he can’t exit his position by buying from any other forex broker. Oanda holds the other side of his trade, and Michael can only get out of that trade by “buying” one lot from Oanda.

[B]In similar fashion, if I want to exit my long position[/B], I can only get out of that trade by “selling” one lot to Oanda, because Oanda holds the other side of my trade.

.

well, in the moment they “net out” their exposure, they are flat on your both trades, so no more sense for manipulation (the big fear that newbies have of market makers)…

while trade matching they are indeed your counterparty, but only for seconds/miliseconds, until they are flat…

so, it’s still the same as the stock exchange…you also don’t buy/sell your position from/to a known individual, it’s also matched by the exchange…

Hi Michael,

A lot of brokers try to highlight their NDD credentials because they know this terminology resonates with traders. That said, some brokers use this term differently from FXCM, so I’ll be very explicit in explaining to you what we mean when we say that FXCM offers you No Dealing Desk (NDD) forex execution.

On our NDD model, we offset each of your individual orders one-for-one with the best prices from competing liquidity providers which include several of the largest banks in the world. This is true even if you place a trade as small as one micro lot which is the smallest trade size that can be offset on the NDD model at this time. That means we do not profit from your losses or lose from your profits regardless of whether you hold your trades for many months, or just a few seconds.

I won’t comment on the execution model of another broker, but they should be able to answer these questions for you. Ask them why they use the phrase “no dealing desk [B][I][U]intervention[/U][/I][/B]” instead of simply stating that they have “no dealing desk” whatsoever. Ask them if it’s possible for them to lose money if you profit on a trade, or for them to profit if you lose money on a trade, particularly if you’re using a short term scalping strategy that makes it difficult/impossible for a market maker to offset their risk on the other side of your trades.

Yes, Trading Station Desktop, Mobile and Web were developed in-house by FXCM’s own software development teams.

The forex market is not centralized, so real volume data are hard to find. Most forex brokers and platforms like MT4 only offer “tick volume” as an approximation. Tick volume counts how many times the price updates instead of the actual amount of currency traded. That may be fine for some traders, but if you want access to the additional information real volume data can provide, this is available on Trading Station.

In this post, I show an example highlighting the difference between tick volume and real volume.

You make an excellent point here, Clint

It’s worth noting that in addition to our Standard NDD accounts, FXCM also offers Mini accounts which use dealing desk (DD) execution. This in response to demand from traders who would like to start trading with less than $2000 and want higher leverage as a result.

For risk management purposes, FXCM limits the leverage we offer on NDD accounts to 100:1 (50:1 in the US to comply with CFTC regulations). That means a minimum margin requirement of 1% on open positions. For traders with less than $2000 in their account, our Mini accounts can be an attractive alternative because the margin requirements can be as low as 0.25% allowing up to 400:1 leverage (outside the US).

As with any market maker, FXCM faces market risk on the as a result of entering into trades with you on the DD model used for Mini accounts. That’s why we reserve the right to switch an account from DD to NDD execution, if a particular trading style presents a greater risk to the dealing desk than it wants to manage.

The fact that we have this option to switch DD accounts to NDD to manage risk means that FXCM doesn’t have to resort to dealer intervention practices that may occur with some market makers that only offer DD execution with no NDD alternative to manage their risk. That’s why you might sometimes see excessive spread widening during news events with such DD-only firms.

Jason, I appreciate your detailed and informative reply. Regarding models, your suggestion to pose the question to Oanda about whether they can profit if a trader loses or if they can lose if a trader profits seems to get to the heart of the matter. Regarding volume, I was unaware that anything but a tick count was available. Thanks again.

It’s my pleasure, Michael :slight_smile:

In the latest version of Trading Station Desktop, FXCM offers you 5 different Real Volume and Transactions indicators:

[ul]
[li]Real Volume[/li][li]Transactions[/li][li]Directional Real Volume[/li][li]On Balance Real Volume[/li][li]Market Movers Index[/li][/ul]
More details on these indicators can be found on FXCMapps.com

Hi Jason,

Regarding Trading Station’s indicator of “retail trader volumes” includes the movements of the large market-making banks, or only individual retail traders?

Again, I appreciate your assistance.

Michael

Hi Michael,

Our Real Volume indicators show FXCM’s retail client trading volume. To give you an idea of the proportion of total retail forex volume thats represents, below is a table comparing our volume to that of other forex brokers. The numbers shown are in billions of dollars.

The stats above are from the Finance Magnates industry report for Q4 2011. I would post something more recent, but that’s the last report that’s available to non-subscribers. I hope the authors won’t mind me revealing that even their latest reports confirm FXCM’s lead over the other firms listed above in terms of monthly trading volume.

Jason, this week I intend to open a practice account on FXCM, with Trader Station. I will begin learning the platform with the USD/CAD pair, micro lots. I understand that the commission for this pair/lot will be $0.06 per micro lot entering the position and another $0.06 closing the position. Is that correct?

Also, what are the primary differences, if any, between the quoting and operation of the practice account compared to a live account?

Michael

Hi Michael,

You understand the commissions correctly. Note that these commissions apply to Standard Accounts. Mini Accounts have no commissions and instead have an all inclusive spread.

Since you’re looking to use Trading Station, here’s a link to some videos on using the platform: Trading Station Desktop Video - FXCM

The prices quoted on your practice account are identical to those quoted on live accounts. However, no demo can replicate the liquidity or lack thereof during major news events. This earlier discussion has more details that can help you make the most of your demo experience: 301 Moved Permanently