Why do ECN brokers levy spreads?

Hello, I am about to open an account with Finfx. I understand they are an ECN broker and not a market maker.

However, I have noticed that they, and other non dealing desk brokers still levy a small spread - like 1.1 pips.

They reason I am going with an ECN is because I don’t want my broker trading against me. I don’t want their interests and my interests to be opposite.

I asked FinFX why they charge the spread, and I didn’t really understand their answer.
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Can anyone enlighten me as to why this spread exists in a non-dealing desk broker and if my trade is successful, does that mean FinFX is losing money?

Thanks

Mark

It is their source of income… They don’t trade against you but they need income some way or another, or else they’d never survive. The spreads are also higher than with market makers because they aren’t taking positions against you.

Regardless of the outcome of your trade, they always make income, this being the spread.

PureMuscle, the spreads ECNs charge are less. Their source of income is supposed to be the commission. That model I like because they make money even if my trade is successful. But the spread would indicate they are trading against me. ’

I read somewhere that the counterparty to my trade with an ECN is some other entity, and NOT the ECN broker. Is this true?

Ok wait I misunderstood you. If you trade with an ECN, the counterparty is a liquidity provider (i.e. a bank). The ECN isn’t trading against you. From what I understand, the liquidity providers supply prices to the ECN which it then aggregates to arrive at the bid and ask prices you see on your terminal. So the aggregate buy and the aggregate sell will never be the same, otherwise it would mean the liquidity providers are letting you buy and sell at the same price.

Still weird though - I’m now using FXCM (non-dealing desk) and they don’t charge any commission on trades, so I don’t know where they get their money from, LOL!

fin, as PureMuscle says, there will always be a difference between bid and ask prices, and that is different to a commission charge.

However, unless you have a reasonably large account (£ $ € 100k+ ish…) then you trade size will be too small for most liquidity providers to be interested in dealing with and will either be offset in-house (by another trader taking the opposite trade to you) or it will be collated with other orders to become passed through to the liquidity provider. The broker will be taking the opposite side to the trade to you until it is out of their hands.

Any ECN/STP broker is always a market maker until you have an account size big enough to trade directly with a liquidity provider.

Cyco, that is disturbing. Finfx told me they don’t trade against the client and that they are Not a market maker.

My problem is that if I am a successful trader, they won’t process my trades, or they will hunt for stop losses, or any of that nonsense. That is why I was seeking an ECN broker to avoid that.

This is what FinFx sent to me by email:

[I]FinFX is a True ECN brokerage. All orders made through FinFX are always directly sent to the liquidity providers to be filled with the best price available. This is the same also on the STP Micro account.[/I]

So do I contact them again and tell them that they aren’t being honest with me and that until I have 100000, they are going to be no better than any bucket shop?

How sure of this are you?

I’d not be overly concerned about stop hunting with a well known, regulated brokerage. HUGE difference between a good broker and a bucket shop. Get over the whole ECN thing. Most losing trades will blame everyone but themselves for their losses, including their brokers, when it is only them at fault.

They have far better things to do with their time - they know they will end up with the majority of trader’s accounts, plus the spreads/commissions along the way. To go stop hunting is for fly-by-nighters, there is enough profit in the business for them to want long term income streams. Unless the broker is US based the regulators leave them alone until they start getting complaints, then its hard work.

The interbank market’s smallest lot size is $5m. Do you think a large liquidity provider would want to deal with a $1k lot?

You didn’t answer my question. Finfx told me they don’t trade against the client, and you say they do. My question is how sure are you that they are lying to me? They say they pass the trade on through to the banks. You say, anything below $100,000 account and they can’t do that.

The salient point is, if they do act as a market maker, then no one can expect to be profitable trading with them because that would mean that the broker will lose money if the client makes money. Under that business model, the broker can only make money if the client is a loser in the end. Nobody has a chance of being successful trading against that business model. That is the whole reason why I need to do business with a non market maker.

I think you are missing part of the picture.

Your trading profits will - even at a market maker - generally make them richer.

Your trade will be either bundled with others and then passed to a liquidity provider if they are all in the same direction, or it will be offset internally against another trader.

i.e. I’m looking at a daily chart and I see EUR/JPY heading up and I go long, you look at a 1min chart and see a shorting opportunity. We both pay the spread, but the trades never need leaver the brokerage. We can both even be profitable, as will the brokerage (2 spreads to you, 2 to me, and as many others the short term trades get offset against a longer one). Or we both look at the 1 min chart and go opposite directions. Again brokerage profits from 4 spreads, and one client wins, the other looses. The trades never needs to be sent to a liquidity provider, and the broker isn’t against you. Or we both look at either the same (or different charts) and this time we go the same way. Now our combined size is a standard lot, and it goes out the door. Still 4 spreads profit for the broker.

You would need to make an enormous profit using a market maker who trades ‘against’ you to upset their profitability, and then when you could be big enough to do that they will be STPing your trades anyway.

I, and many profitable traders here, are using market maker brokers. They could very easily stop hunt, but they don’t - I’ve had moves come within 1 pipette of my stop and not hit it.

Worry about being profitable - its harder than it looks - and find a broker who’s customer service and software you like.

What Cyco is saying is right.

All major ECNs act as your initial counterparty anyway, even when the order is being passed off to an LP on the other side of their network.

Heck, even the CME works this way in futures. In their fine print, your direct counterparty is always and will always be the CME, even if you’re a pit trader who looks the trader you’re exchanging contracts with in the eye when you trade. The CME takes on that legal position to ensure clearing happens and the exchange goes smoothly.

This is how most ECNs can claim you remain anonymous on their system, as the LPs and banks who are feeding quotes to the ECN only see the broker trading, not Joe Schmoe’s account trading through the broker.

Seriously speaking, so long as the broker isn’t messing around with the price quotes they feed you (and that’s the key thing about going with an ECN style broker over others, they pass a raw quote feed to you that they themselves don’t mess with,) and you’ll get the same fill and price through them if they are STPing your order through or internalizing it, then it really doesn’t matter what’s going on in the back office of the broker since you and your trade is not affected.

Please try to avoid saying a broker is lying and you find whatever “disturbing” if you are still in a stage where you’re researching how this all works. (I don’t mean to be blunt, just saying.) It’s not your fault for being alarmed, the terminology and marketing (anti-market making advertisements by STP/ECN brokers when there’s not much actually wrong with market making) really leaves a strong impression but often it’s just over-simplified or a bunch of fear spreading bull crap…

Read again what you are saying. With any business model, you need people that brings money. If trading would be unprofitable, people would stop trading with them.

And they want you to make profit, so that you will continue to trade. Every trade is another cent/dime in their pocket.

You can’t avoid to pay one way or the other. No broker will do it for free. You just have to deal with the conditions and consider them in your trading plan.

By the way, Cyco is correct. It is called netting. They do it with stock too. Every night all positions are set off against the other and the residu is put on the market. A bit simplified, but that is the principle.

Hi PM,

On our No Dealing Desk (NDD) forex execution model, FXCM takes the best bid and the best offer from 10+ liquidity providers and adds a pip mark-up. In the example below, you can see the NDD spread on EUR/USD is 2.6 pips. The sell price is 1.29040, and the buy price is 1.29066. Removing our pip markup, we can determine that the best bid from our liquidity providers at the time shown was 1.29050 (or 1.29040 plus 1 pip). In the same way, we know that the best offer from our liquidity providers at that time was 1.29056 (or 1.29066 minus 1 pip). When a client sells EUR/USD at 1.29040 on our platform, we immediately offset the risk on the other side at 1.29050 to make a 1 pip profit. When a client buys at 1.29066, we immediately offset at 1.29056. In this way, the NDD model allows FXCM to make a profit based on the trading volume each time an order is executed without ever taking a market position eliminating a potential conflict of interest between us an our clients.

[B]Standard Spreads (No Dealing Desk)[/B]

It is worth noting that FXCM also offers traders a Dealing Desk (DD) option, where we act as a market maker, setting the prices and spreads on which you trade. In this execution model, FXCM is on the other side of your trades. That means a loss for you could result in a profit for us, or vice versa. Because we are the market maker on the DD model, FXCM’s dealing desk is able to offer lower spreads than those provided by the NDD model. DD execution is used by most brokers in the forex industry. However, FXCM’s DD is different, because we still use the FXCM NDD price feed as a base to derive prices and execute orders. We just reduce the markup by half a pip on each side, resulting in a spreads that’s one pip tighter as you can see below. That means that our DD execution shares important features with our NDD execution such as no re-quotes and no restrictions on stops and limits.

[B]Lower Spreads (Dealing Desk)[/B]

If you have further questions about either of our two execution options, feel free to ask me in the Broker Aid Station.

Jason

Jason,

Can you explain how you deal with the fact (or myth?) that only orders over $1M (or $5M according to others) are executed with the liquidity providers?
If i understand correctly most traded orders are at $10Ks.

Hi InraidoTrading,

Great question!

Time have changed. I remember back in 2005, the smallest orders banks would take from our dealing desk were for blocks of 1 million. In 2006, we introduced No Dealing Desk forex execution, because the liquidity providers on our NDD price feed agreed to offset orders as small as 10k from our clients. By July of 2007, all of our clients except for microlot traders were on NDD execution. Then in 2010, we got liquidity providers to agree to offset 1k microlot orders from our clients and so were able to migrate all FXCM Micro clients to NDD execution. For this reason, we no longer make a distinction between micro and standard clients, and all FXCM accounts can trade orders as small as 1k on NDD execution.

While FXCM recommends NDD execution as it provides the best overall trading experience, we recently introduced a new dealing desk execution option to provide lower spreads for twelve of FXCM’s most popularly traded currency pairs. Dealing desk execution is used by most brokers in the forex industry. However, FXCM’s dealing desk is different because we use the FXCM NDD price feed as a base to derive prices and execute orders. This means that our dealing desk execution shares important features with our NDD execution such as no requotes and no restrictions on stops and limits.

Welcome to the forum :slight_smile:

Jason

Hi Jason!

Excuse the slightly rude question, but I’ve wondered for a long time why FXCM offers substantially worse spreads than almost all of their competition? EURUSD 2.6 pip spread is a brilliant example of this, isn’t it?

My broker has a spread right now of 1.3 pips EURUSD and that is indeed the spread you get when you place a trade, this is also the normal or average spread… Not just EURUSD but all over the list of instruments FXCM stands out as expensive.

I’m sure many potential customers of FXCM wonder about why the biggest player in the industry retail-wise offer such poor spreads?

Hi Magnus,

Your question is not rude at all, and I’m glad you asked :57:

It’s no secret that the brokerage industry, for both forex and futures trading, has been in the midst of a price war for the past couple of years. That combined with lower trading volumes last year have caused many brokers to struggle. There was even a broker in Europe that went bankrupt after trying to entice clients with 0 pip spreads. Last year also saw the failure of a US broker that had previously touted their razor thin spreads. We’ve had other brokers have to pull out of the US after being unable to meet regulatory capital requirements.

If recent events have taught us anything, it’s that the financial stability of the broker you choose can have far greater implications than we previously thought. Unfortunately, the vast majority of these brokers are privately held companies, so it’s hard to know the state of their finances. Are they profitable, or are they barely staying afloat? How can you know whether they are safe place to keep your money?

FXCM is a publicly-traded company (NYSE ticker: FXCM), so information regarding our financial data is readily available. This is one of the reasons why traders have entrusted us with $1.2 billion in client funds (as of our latest quarterly results). Spreads are important, but they are just one factor out of many to consider when choosing a broker along with 24 hour customer support, trading platforms offered, education, resources, etc.

We seek to provide competitive spreads while also delivering great execution and a safe place for you to hold your funds. For traders whose primary concern is low spreads, we now offer a dealing desk execution option with spreads that are 1 pip lower for the most popular currency pairs than on our No Dealing Desk (NDD) forex execution.

Dealing desk execution is used by most brokers in the forex industry. However, FXCM’s dealing desk is different because we use the FXCM NDD price feed as a base to derive prices and execute orders. This means that our dealing desk execution shares important features with our NDD execution, such as no requotes, and no restrictions on stops and limits. Here’s a link to a demo if you want to try our new lower spreads for yourself.

Jason

According to my understanding Electronic Communication Networking money makers communicate with their clients through technology only, the reason behind that is with the help of mass media they can make connection with more than one person at the same time. These traders link with their customers for making themselves financially strong. They never go against their customers as they try to spread awareness about their business whether through websites or with the help of advertisements. In this industry they always try to get more opportunity from new doors and make profitable trade .On the other hand citizens of a particular country always run away from them as they fell them as fraud . For making business strong and making more money they use different strategies on their clients. I feel that for keeping strong relationship among other colleagues and for staying the competition they force themselves into the work. Not only in this business in every business everybody has to active in their fields.

A ECN (Electronic Communications Network) account is a pure order-matching execution system, where the account provider charges a premium as commission per trade instead of artificially inflating the raw spread which occurs naturally within the order-matching process.
ECNs are computer-based systems that display the best available bid and ask quotes from multiple market participants, and then automatically match and execute orders. They not only facilitate trading on major exchanges during market hours, but they are also used for after-hours trading and foreign currency trading.
A higher than normal spread generally indicates one of two things, high volatility in the market or low liquidity due to out-of-hours trading. Before news events, or during big shock (Brexit, US Elections), spreads can widen greatly. A low spread means there is a small difference between the bid and the ask price.

Yeah I mean ECN broker surge spreads in such a way that the trader encounters a fee (it differs broker to broker obviously) for every execution in order to trade the forex market, in order to obtain profits from every transaction. idk maybe the expectation from each trade should be over the spread amount to capitalize on every trade. In each currency pair the cost of spread is different and also the trader should account for those variables in order to make more money than the actual spread cost.
To get rid of these spreads, one needs to be very alert while choosing the broker. Here are some of the broker who can be a very good option -
Fxpro, Pepperstone, Fxview, XM and HYCM.
Out of these, one broker I have been trading with for quite a time is Fxview.
As per my experience the broker is good to go. I started trading with them recently and I am truly impressed with their conditions. Their spreads plus commissions are lowest among all brokers I have ever traded with. Commission charges are only even less than 2 dollars lot rt. For trading platform like all other forex brokers they too offer metatrader both MT4 and MT5, they have acttrader too. So far experience has been really good.
Hope it helps.