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
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