[quote=“Leg0nd, post:1, topic:119246, full:true”]
I’m trying to find the relationship between Forex volume and price mathematically speaking so I can create my algo. Finding out major brokers contribution to market volume seems like a fair start for me.[/quote]
@Leg0nd - Hello
• The algorithm you intend to create will never yield useful information. Here’s why:
You are basing your efforts on the misconception that the volume handled by a broker determines the prices offered by that broker. Think about your assumption, for a moment. If that were the case, then high-volume brokers would offer very different prices from low-volume brokers. But, this is not what you will find, if you do some broker comparisons.
The foreign currency market is one market in which prices are set by market-makers at the top of the forex food-chain. These market-makers are the big banks in the interbank network and the central banks of several major countries. This market-making process is basically a process of driving prices into pools of liquidity in order to fill orders (and to generate speculative profits for the banks). Each bank makes their own prices (Bid and Ask), but their prices can’t deviate too far from the prices of their competitors in the interbank network – otherwise, competitor banks will simply arbitrage the disparity, buying low from one bank and selling high to another bank, the result of which will be to force divergent prices to approach convergence. So, there is typically a tight cluster of prices among the banks in the interbank network.
Retail forex brokers (the folks you are proposing to study) generally deal with several (or many) of these big banks. The brokers typically refer to them as liquidity providers (LP’s). Brokers pick and choose the best available prices from the LP’s they deal with, and this picking-and-choosing has exactly the same effect as the arbitrage that I mentioned above – it tends to buy up the low prices and sell down the high prices, forcing convergence.
Brokers who operate as retail market-makers then take the best wholesale prices (the best Bid and best Ask) offered to them by their LP’s, and mark them up by adding a pip or two to the best available ASK price, and subtracting a pip or two from the best available BID price, which results in the retail prices offered to us, their retail customers.
Retail brokers who operate as STP or ECN brokers do not mark up the wholesale prices of the LP’s. Rather, they pass those wholesale prices on to us, and charge us commissions proportional to the size of our trades.
In both of these cases – market-maker and STP/ECN – retail brokers move roughly in lock-step with the market determined (made) at the interbank level by the big banks. If a significant difference occurs between the prices of retail brokers, retail customers with sophisticated trading algorithms will quickly arbitrage the difference, earning a profit when the divergent retail prices are forced to converge.
So, that was a long-winded way of saying that you won’t find the correlation you are looking for between retail prices and retail volumes (or any other retail metric).
• Regarding tick-volume – Ticks are price changes, not trades. If a broker’s ASK price notches up by one pip, and two buy orders are filled at that new price, the change in tick-volume is one tick (representing one change in price), not two ticks (which would represent two additional trades). So, you can’t take the tick-volume in a particular currency pair, for a particular broker, in a particular time period, as the number of trades in that pair, handled by that broker, in that time period.
However, for a given currency pair in a given time period, every retail broker’s tick-volume is roughly proportional to that broker’s retail trading volume. And that approximate proportionality can be used profitably by VSA traders. Check out Petefader’s thread Supply/Demand, VSA, Wyckoff with Petefader on using tick-volume in trading.
And, for a given currency pair in a given time period, very large (high volume) brokers’ tick-volumes are roughly proportional to trading volume in the overall forex market. And that approximate correlation is very useful for studying trading patterns in the overall (worldwide) forex market. It’s the basis for many studies (including my own) of daily trading sessions based on trading volume.
• Regarding FXCM – As you may or may not be aware, FXCM no longer operates in the U.S., although they are active elsewhere in the world. Overall, FXCM is a much smaller broker than they were 2 years ago, when you were last here in the forum.
• Regarding the trading volume of the U.S. brokers – Currently, there are just 4 retail forex brokers licensed to operate in the U.S. Two of them – Gain Capital’s Forex.com division, and Oanda – have about 81% of the retail forex market in the U.S. The other two – TD Ameritrade and Interactive Brokers – together have the remaining 19%. These percentages are based on customer funds on deposit, not trading volume. However, trading volume handled by each broker is roughly proportional to the customer funds they hold. So, those percentages will give you a rough idea of trading volumes at the 4 U.S. brokers.
These metrics are reported monthly by the CFTC (the regulator of futures and forex in the U.S.). The latest figures available from the CFTC are figures for August 2017. September’s figures will be released in a few days (there is generally up to a month’s delay between the end of a reporting period and the release of data for that period).
For August 2017, customer funds on deposit at the 4 U.S. brokers were as follows:
Gain Capital (forex.com) - $254,086,577 (48.8%)
Oanda - $168,185,010 (32.3%)
TD Ameritrade - $59,682,599 (11.5%)
Interactive Brokers - $39,037,499 (7.5%)
Total for 4 brokers - $520,991,685
