Is your broker trading against you?
MANAGING DIRECTOR, FXCM
FOREX TRADING in the UK has become extremely popular with increasing demand for improved trading platforms and trading services. Many people trade FX via their spread betting or CFD provider. However as retail traders become increasingly sophisticated will the classic spread betting offering be enough for the man on the street?
No Dealing Desk is a new type of execution technology which is now threatening to change the role of the typical spread betting and CFD houses from glorified bookies into high-tech trading firms offering access to the inter-bank forex markets.
SO, HOW DO TRADITIONAL SPREAD BETTING FIRMS MAKE MONEY?
Spread betting firms may act as a market maker and run a trading book against their clients, regardless of whether you are trading a spread bet, CFD or an FX contract. This means that when you open an FX position with them they can take the opposite side of your trade and your position will not be traded in the market. If your position makes money, the broker will be out of pocket, if you lose money your broker will make a profit of the same amount as your loss.
Alternatively, if you are a successful trader and make money on a regular basis the broker may manually hedge all of your orders in the market which means you must wait for a dealer to process and accept your order before your trade is confirmed. If the market moves in between the time it has taken the dealer to receive and process your order you may also receive a re-quote.
Example 1. Your broker is running a trading book against you: You go long of EUR/USD and the firm takes the opposite side of your position rather than hedging it. If on closing the trade you are up £1,000, your broker will have lost the same amount of money. Do this too many times and your broker will start to manually hedge every single order you do which could mean re-quotes, execution delays and wider spreads.
Example 2. Your broker’s dealing desk is manually hedging your positions: Your broker decides to manually hedge your orders in the market which means that every time you place a trade a dealer must accept the order or will provide you with a re-quote. You go long of EUR/USD with the view to making 100pts on the trade. On accepting your order, the dealer can wait a period of time before hedging your order in the hope of being able to hedge at a lower price. Generally, customers who have prices move in their favour quickly after getting filled are unprofitable for the average spread betting firm and dealers may use re-quotes, execution delays or widened spreads to discourage such customers.
HOW DO BROKERS WHO USE NO DEALING DESK MAKE MONEY?
No Dealing Desk technology (or NDD for short) gives you access to trade with many of the worlds largest liquidity providers which all compete for your business. Instead of trading against their clients, brokers who use NDD are actually providing their clients with rates taken from a multitude of different banks and instead make money in the form of the dealing spread. The NDD technology automatically finds the best bid and best offer rates and streams them through to your platform so that when you are placing a trade, you are dealing on some of the most competitive FX rates.
Spread betting and CFD firms who invest in NDD technology no longer need to hope to bring on clients who are unsuccessful traders. In fact, NDD enabled brokerages rely on trading volumes, so they want and need their clients to be successful overall.
MY BROKER CLAIMS TO OFFER NO DEALING DESK, HOW CAN I TELL IF THIS IS TRUE?
A broker who offers No Dealing Desk will not give re-quotes or restrict certain trading strategies. The role of an NDD broker is purely as a middle man to your deals. In return, NDD brokers make a transactional based commission. There is no incentive for them to restrict your trading in any way.
WHY DOES MY CURRENT BROKER GIVE ME RE-QUOTES?
Most spread betting firms have staff working on dealing desks that monitor all orders that are made via their trading platform. Their job is to process your order internally and regardless of whether they are running a position against you or manually hedging your trade, delays can often be experienced especially during periods of market volatility or during important market news events. No Dealing Desk allows brokers to process all orders automatically from the point the customer places the trade on their platform all the way through to the trade being executed with the bank. NDD has removed the need for any manual interaction which means quicker execution and importantly no conflict of interest between the broker and client.
WHY DOES IT SEEM TO TAKE LONGER FOR LIMIT/STOP-LOSS ORDERS TO BE FILLED WHEN I AM TRYING TO EXIT A WINNING POSITION?
When brokerage companies run a book against their clients, their dealers are watching all of the pending orders that clients have waiting to be executed at a specific price. If a customer’s position is moving close to their stop-loss, the dealing desk will be ready to fill the order as soon as it touches the stop-loss price. On the same token, if a customer is making a healthy profit and is near to a limit order, the dealing desk lacks the incentive to fill the order as quickly because it represents a corresponding loss to the dealing desk’s daily profits. No Dealing Desk removes this conflict of interest; instead stop loss and limit orders are executed at the best bid/offer price made available by the broker’s liquidity providers.
WHY DOES MY CURRENT BROKER RESTRICT ME FROM CERTAIN TRADING STRATEGIES?
Experience suggests that firms who do not have NDD technology tend to prefer customers who use range trading strategies where the client is buying into falling markets and selling into rising markets. The reason that they like this type of client is because typically the time between their orders will be hours or even days giving the dealing desk enough time to process each order. Dealing desks can struggle with more aggressive trading strategies where clients are trading very tight ranges in order to make just a couple of pips on each trade. Such strategies are often referred to as Scalping. Dealing desk spread betting firms could ask you to stop trading in this way, particularly if you are making a profit as a result.
No Dealing Desk enables the broker to accept all types of trading, including scalping. This means that as their clients’ trading strategies change, they can still accommodate their needs.
WHY DOES MY SPREAD BETTING PROVIDER INSIST ON STOP-LOSS/LIMIT ORDERS BEING A MINIMUM DISTANCE FROM THE MARKET PRICE?
Most firms do not permit you to place pending orders too close to the market price; usually they restrict you from doing so by up to 10 points. This is done because dealing desk spread betting firms need enough time to process your order. If you place an order with a stop-loss or limit order only a couple of points away from the market rate it will not give their dealers sufficient time to hedge your opening order and then trade out of it once the pending order is inevitably hit.
NDD does not restrict where you place your pending orders, in fact you can even place them within the spread.
WHEN I LOOK AT THE CHART IT HAS TRADED THROUGH MY STOP-LOSS/LIMIT ORDER, WHY DOES THIS HAPPEN?
Trading during volatile and quick moving markets can make trading conditions difficult, particularly when trading during news events. When a currency takes a sudden move, often it will be accompanied by reduced liquidity in the market making it harder to fill your order. A traditional dealing desk broker could use this as an excuse to manipulate the price that your order is filled at, where an NDD broker will fill your order at the best available price at all times. Either way, reduced liquidity can cause disadvantages to both forms of execution, the only difference is that you will be treated impartially by an NDD broker.
Forex, CFDs and Spread Bets are leveraged products that carry a high degree of risk to your capital and may not be suitable for all investors. Therefore, you should only speculate with money that you can afford to lose.
WHAT ARE THE BENEFITS OF NO DEALING DESK?
In general, NDD gives traders the following benefits over the traditional execution methods the spread betting and CFD firms use:
• No conflicts of interest between broker and trader
• Usually there are no trade re-quotes
• Place limit and stop orders within 1 pip of the market price
• No dealer intervention
• No restrictions on your trading style
• No maximum deal size
• Anonymous trade execution