How do I figure out if my trades are being routed to a liquidity provider versus the broker's dealing desk? In other words, how do I know when my fx trading account is just like any other normal trading account? THX
In Australia, forex brokers are required to provide you with a Product Disclosure Statement. This document will tell you how they execute their trades. I'm not sure if brokers in other countries have a similar document they can provide you.
The same is true of brokers registered in the US by the NFA. The execution method and details will be listed in the trading agreement.
It can be pretty ambiguous at times though, I read one the other week which said something along the lines of 'we're counterparty but we don't trade against our clients' and then 'we may not offer best prices available', and to top it off they're 'proprietary trading on our own behalf'!
All fx brokers are counterparty. It doesn't mean they are a dealing desk. For example, lets say a broker provides a platform of best bid / best offer liqudity of 6 banks. When you trade you are hitting the bank's bid or offer. However, the broker is counterparty your transaction and counterparty to the bank's transaction. Is just a back office reconciliation item. Nothing more than that.
Open to abuse though, and there's an obvious conflict of interest just the same as there would be for a bucketshop. Personally I can't see the attraction of these ECN-style shops.....
I think the spirit of my original question was misguided. I'm currently at FXCM with a mini-account so all my trades are against the broker - so how do I know when my account is switched over to regular status (aka commission)? Of course this is based on the premise that my trading skills will continue to net me big profits consistently. Thanks
Do you mean micro to Standard mini, or mini to Active Trader? What's your minimum trade size, >1k or >10k? If you're trading micro (1k) and they're going to put you on NDD execution then I expect you might see a deterioration in fills compared to the instant execution of their micro model as there's less competition for 1k business, the majority of liquidity providers don't want it which is why these shops have to hedge on aggregate. I've never traded with FXCM so maybe you won't see any difference at all!
It depends on trading style....read up on the pros and cons, there's plenty of information available out there about how this business works, use your favorite search engine.