Question About Dealing Desk Execution

Beginner Questions
1

Hi All,

Newbie here and this is my first post.

Got an email today from my broker that my account will be automatically upgraded and will have a low spread in major currencies. I said its great but as I read below this upgrade will put me to Dealing Desk instead of NDD. I only know that by being in DD the broker can manipulate the price against me so I ask my broker if they can upgrade me but I’m still in NDD. They replied that unlike all DD firms where they make their own prices, their DD still offering stream qoutes from the NDD feed and that they can’t manipulate the price and that their prices will still be from their liquidity providers which gives me a doubt.

Im new to fx so please enlighten me about this DD stuff they said.

This email also giving me an idea how bad I am as a trader as I am offered to be in DD :18:

2

hi lenerd5000!
am looking forward to seeing more responses on this - it’s an important issue you’ve raised. my initial instinct is that’s it’s a bit naughty for your broker to change your account type. Just because they call it an “upgrade”, you are right to be cautious. keep us posted.

3

There is actually nothing wrong in trading with a DD. You know that your stops and limits will be honored. Only issue is on how good the broker is in honoring those requirements.

Most DD’s make their regular income by marking up the spread. So if EURUSD is trading at 1.05 bid, your DD will quote you/allow you to buy at 1.0505 (his cut will be 5 pips from the market rate). Vice versa for asks.

Some DD’s, depending on a trader’s profile/trading activity (considering they are losing more than winning) automatically put them to B-Book, or in-house trades so they can make some extra $$'s, but in general with a DD your buy is someone else’s sell (not necessary at same price).

As to manipulating prices, that’s a bit tricky to answer. But give it a go. Place some pending orders and stop loss and TP’s and see how they are filled, it will give you a fair idea.

4

thanks @andyCullen will give an update here of what will happen.

If in DD, to make money is to increase spread, then that’s something because they said I will be having low spread from what I currently have now.

What is B-Book or in-house trades by the way? How it works? Is it good or bad? As long as they dont cheat me that’s ok with me although I doubt it. I can also opt out to the offer if I want to or if it has been upgraded I can still open another account for NDD. But will try your suggestion @jw1981. I’ll give it a go and place some orders then let’s see. I just started trading with them by the way.

Does anyone have an idea why they want me to upgrade? Has someone experience this?

5

Your options:

1.) Be brave and go for it and risk your whole account with that dealer.
2.) Get scared and pull your whole account from that dealer.
3.) Deposit only a small portion of your trading capital with that dealer and proceed with caution.

Don’t be afraid of DDs. They are no better at predicting the future than your local palm reader. And STPs/ECNs simply forward your order to Market Maker anyway.

Do the following mental experiment: Imagine you are the DD and think of all the possible scenarios you will face. The only time that “running someone’s stop” becomes profitable is when there is less market between the DD and that stop than the stop is worth. Now if you are the DD you would love that. But you can’t MAKE that happen just as traders out there can’t make the market hit their profit target. DD’s have as much control over the market as do retail traders: none.

If you are losing money as a trader, it is not the DD that is the problem, it is you. If you think you can out-trade other traders and make money then the DD is just another trader you have to beat. You can’t do that by predicting the future. You can only do it with risk management.

Now if your dealer is truly shady, if they say the market is where it ain’t, then they are not a DD or a MM. They are simply a swindler (and if they are a swindler they are probably telling you they are an ECN/STP dealer) and you’d better have a way to protect yourself against that. That would be option 3.

-Adrian

6

Thanks Adrian. That explains a lot. I will take the option 3 then. :slight_smile:

7

Lenerd, who’s your broker? It might raise awareness among other traders

9

its FXCM eddieb

10

my broker is FXCM eddieb. i think they want me to upgrade in FXCM Markets which has 400:1 leverage and DD execution because of my small account.

11

They was, are and will be counterparty to all orders. At least this stated on their website. That fact is enough to understand that they’re market maker and play against you.

12

What?!? FXCM has a dealing desk?!?! But I thought market makers were all ski-mask wearing thieves!!!

-Adrian

13

hi lenerd500 what happen at last with your broker and the upgrade?

14

That’s one way for them to raise some finance to pay back the borrowed cash used to bail them out from going bust because of the CHF tanking weeks back.

15

And so here is the big question of course…

Is an FXCM dealing desk in another country one of the liquidity providers in their ECN? Does FXCM forward orders through no dealing desk execution in the U.S. to a dealing desk they own somewhere else?

-Adrian

16

Hi Adrian,

If there were any doubts before, it should be pretty clear now that FXCM does not benefit when clients lose on our No Dealing Desk (NDD) forex execution. That’s because we offset each of your orders one-for-one with the best prices from competing liquidity providers. Furthermore, these liquidity providers are independent third parties, which means FXCM doesn’t profit from your losses, or lose from your profits. Instead, we make money from your trading volume.

In fact, with our new super-tight spreads, we have replaced the old markups to the spread with transparent commissions, so you can see exactly how much we make for executing your orders. The live FXCM spreads you see here are from the best bid and ask prices we receive from our liquidity providers without any markups: bit.ly/1shNooZ

17

Given what happened with EUR/CHF, the industry is now looking very hard at any potentially similar issues, especially with the increased geopolitical risks in Southern and Eastern Europe. The primary change FXCM has made is to remove currency pairs from our platform that carry significant risk due to over-active manipulation by their respective government either by a floor, ceiling, peg or band. We also raised margin requirements for other pairs as well. Some of these changes will be permanent while others may change as geopolitical risks change.

However, we have received demand for higher leverage (lower margin requirements) particularly from traders in emerging markets where the average account balance is smaller. Offering these traders a DD option in the future in addition to our existing NDD model will allow us to cater to their demand for higher leverage from a risk management perspective. We still expect the majority of traders to continue to choose our NDD model.

Since we are a publicly-traded company (NYSE ticker: FXCM) the details of our finances including the loan from Leucadia are well known. In fact, in our most recent quarterly earnings presentation, we clearly outlined how we plan to repay this debt:

Over the past few years, FXCM has spent over $250 million dollars making strategic acquisitions building up our non-core businesses, mainly the institutional side as we tried to diversify the firm. We are now looking to sell some of those non-core assets; But, we are not in a rush and are looking to get the highest valuations for these assets. We are considering closing or selling smaller regulated entities that require large sums of capital requirements, but that offer increasingly low return on capital. In fact, just recently we announced this news: FXCM to Sell FXCM Japan to Rakuten Sec for $62 Million

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The latter move allows us to free up significant amounts of cash that is currently trapped. We believe that in the near term we can pay down a majority of the loan. That’s our goal. We have now repaid $66 million under the credit agreement, and as of April 1, 2015, the outstanding Leucadia loan balance is $244 million.

FXCM is pleased with how our debt reduction plan is proceeding. We are ahead of plan and the results of the FXCM Japan sale exceeded our expectations. With all the increased attention to our other properties, we are expecting robust and competitive auctions for the other non-core assets we have targeted to sell. We anticipate making an additional repayment of approximately $12 million towards the credit facility in the coming weeks.

By contrast, most other forex brokers are privately-held companies, so it’s hard to know how much debt they have on their books or the state of their finances. Despite the events of January 15th that resulted from the Swiss Franc movements, FXCM today remains in a strong competitive position:

[ul]
[li]$303 million in consolidated operating cash
[/li][li]$1.0 billion in customer equity
[/li][li]195,000 active retail FX accounts
[/li][li]Global regulatory capital of $252 million versus $93 million minimum requirements (an excess of $159 million)
[/li][/ul]

18

Thanks Jason, a more than adequate explanation for me to shut my mouth!

it really does go to show though, how can the fx broker industry change to not only protect themselves, but also the client funds from such a black swan event repeating.

19

As you should know, I personally am completely fine with dealing desks and market makers. I am also totally fine with FXCM and with FXCM running a dealing desk. What is annoying is the marketing that FXCM and others put out that says any market maker or dealing desk has a “conflict of interests” and can be depicted as a ski mask wearing thief. But all the while FXCM has a dealing desk. Does that FXCM dealing desk have a “conflict of interests”?

-Adrian

20

Good question, Adrian

FXCM’s new risk management policy requires the reduction of leverage on all NDD accounts up to a maximum of 100:1. In response to demand from traders, we have decided to offer a DD option to clients with less than $10,000 so they can get access to higher leverage up to 400:1.

We strongly believe the No Dealing Desk (NDD) model is the most fair and transparent that we can offer to traders. We also believe it is important for traders to understand the conflicts of interests that exist with dealing desk (DD) execution and still expect most traders to choose our NDD execution.

The fact that we offer NDD execution sets us apart from most brokers offering a DD option. (In fact, with them, there is no option. It’s DD or nothing.) That means, we don’t have to resort to the dealer intervention practices that can exist with some DD brokers.

Transparency has always been at the core of everything we offer at FXCM. While other brokers don’t tell you what the restrictions are with their execution and you end up finding the hard way, FXCM provides you all the information you need to make the right decision and have an excellent up to your expectation trading experience.

On the DD option, we will face market risk as a result of entering into trades with clients. Because of this risk, FXCM needs to implement certain restrictions* during news events. Additionally, we may take steps to mitigate the risk arising from market making more effectively by transferring your underlying account to our NDD offering. FXCM may also choose to transfer your account to NDD should the equity in your account balance exceed the 10k maximum.

[I]* The typical 2-5 pip minimum distance from current market rate for stop and limit orders on DD accounts could increase to upwards of 10 pips. Note that NDD accounts with FXCM have no such restrictions regarding order placement.[/I]

21

hi Andy,

I confirm that they upgraded it. Will try on monday :slight_smile: