Hi Ontario,
That’s a very good question. The trade-off between spreads and liquidity would still exist on an ECN. And when I say ECN I’m referring to trading venues where you might expect larger players such as hedge funds and HFTs to trade such as the CME, EBS, Reuters, FastMatch, etc. It’s almost more dangerous to offer generous liquidity on tight spreads at the ECN level because of the sophistication of participants such as High Frequency Traders (HFTs). HFTs are typically in and out of trades in milliseconds and run algo strategies to automate their trading. As before, if you’re wrong, it’s better to be wrong on a small amount because mistakes will be taken advantage of very quickly by HFTs and other sophisticated participants. (A topic that could go on even more. Read Flash Boys if you want to learn more about HFTs and background on what can happen with liquidity)
Compare the trading style of an HFT to that of a retail traders. Even the fastest retail traders are likely to hold trades open for a few seconds or more. The longer trading time frame makes it possible for liquidity providers to be more flexible with their pricing.
To further compare ECN vs. retail trading… FXCM did a study in 2016 that compared the price at which actual trades were executed at with FXCM compared to the quoted price at that exact same time on the futures market and the interbank market to see which venue had the better price. The study is based on the trade data of FXCM LTD clients on NDD (STP) forex execution of over 40 million orders from October 1, 2014 through March 31, 2106. The study found that orders executed through FXCM were equal to or better than the futures price 81% of the time and equal to or better than the interbank price 94% of the time. And that compares the actual order execution at FXCM which includes any slippage, with the quoted price at the futures or interbank level not taking into account potential slippage. The full study can be found here fxcm_ltd_execution_study.pdf (1.9 MB)
So just because you may be able to trade on an ECN doesn’t necessarily mean you are going to get better pricing.
Back to order management… If you plan on trading large amounts of volume, say over 500k to 1M per click, then consider breaking up your order. If the broker you are trading with offers depth of market (available at some STP brokers), review the amount of liquidity typically available at the top of book. Keep in mind volatile periods such as news events may attract a larger number of orders from other traders as well, so you’re not the only one competing for that top of book liquidity. If you’re trading with a dealing desk broker, ask the broker what amount of liquidity they typically have on offer at the quoted price and what maximum order size they suggest per order. Their main concern is being able to effectively manage the risk on that trade and offset it internally or with their own liquidity providers.
As for FXCM, we run a hybrid dealing desk/no dealing desk model. The best available bid/ask is aggregated from multiple liquidity providers to automatically determine the spread, and our trading desk may execute trades internally or offset with a liquidity provider based on certain risk parameters. The advantage is that it gives us the ability to offer execution with no restrictions and accept trading strategies such as scalping, while effectively managing the risk.
Sorry for the long answer . Have a great weekend.
Jason
*Past performance is not indicative of future results. The study does not in any way attempt to represent that FXCM maintains a particular capacity or performance level. The figures in this study are provided for information purposes only, and are not intended for trading purposes or advice.
Trading forex/CFD’s on margin carries a high level of risk and may not be suitable for all investors as you could sustain losses in excess of deposits