I just don't understand how no mark up equals transparancy and the broker costs factored into the spread equals not transparent. Someone help please.
To put it simply, many brokers don't charge 'commission', but markup their spreads above what they receive on the interbank market to pocket the difference. I'm never going to be the one to fault firms for how they make their livelihoods, but I prefer having a very transparent markup-free spread with a commission added on top. This keeps it simple: I know what I'm paying, and I'm fairly confident that I'm not overpaying.
The worst are the brokers who run Currenex platforms and yet still widen the spreads. One Currenex hub I recently tested was giving me 3 pip on USD/JPY and 2 pip on EUR/USD, even during the US/Euro overlap, they must think I was born yesterday... IB's spreads are hard to beat these days, they're very competitive with the institutional ECNs like Hotspot FXi, FXall, etc.
An explanation of fixed spread (no commission) trading thru a dealing desk vs. commission trading thru an ECN (been discussed here MANY times) A dealing desk broker does not charge a commission but marks up or widens the spread between the bid and ask that a bank is quoting them. Ex: EUR/USD On an ECN, current bank quote 1.3873 ~ 1.38735, (sometimes more, sometimes 0 pip) a .5 pip difference between what you could buy it for and what you could sell it for. Your trade would have to move .5 pips (before commissions) before you can break even let alone turn a profit. Commissions are determined by the broker, but some common prices are $2/$100k in notional value (IB) $5/$100k in notional value (MBT, EFX) and $3/100k bcu (Hotspot). These rates are per side, so double charge to get in and out. A dealing desk, or market maker as they are known, will then offer the pair on his platform with a quote of 1.3873 ~ 1.3875, or a 2 pip spread, or a 300% difference then what he is being charged. As a trader, then, in order for you to make a profit, your bid must now move 2 pips before you can break even, let alone profit. There are no commissions. Now, which is better? If you want to always know what a trade will cost you in dollar terms, then that would be the MM model with the fixed spreads. You will always know that in order to break even you will need your price to move 2 pips before you can break even. But this also comes at a price - the MM needs to offset your trade with the banks to insure that they do not lose money. Fine and dandy if you are a swing trader, but if you are attempting to be a news trader or scalper (most self described fx traders here think they are and can beat the banks at their own game!!) you WILL encounter problems with your broker and trading platform as they can't offset your trade if you are only in it for less than a minute. Plus, during volatile news moments, they cannot guarantee you a fixed 2 pip spread on the Euro when the banks are quoting them up to 20 pip difference (law of supply and demand people - read it). What does the MM do - crash the platform (see FXCM), requote and requote you (see any MM) or freeze the platform and lock you out (see Oanda). This behavior will cost you money if you are a scalper or news trader - if you can't make a trade, then that is lost money. The cost of ECN trading will vary depending on the spreads and dollar value of the pair. Take our EUR sample - .5 pip difference plus MBT commish of $10/$100k round turn. To get in and out of one lot will cost $13.78/100k lot plus pip spread (.5/100k = 5) for total cost of $18.78 (a 2 pip spread would cost $20) So trading ECN at MBT, it would cost you 1.8 ~1.9 pips to break even. (BTW, I use the MBT example because they are the most expensive. personally, I would never pay that if I am on an ECN) Now, a thread poster who has been using Oanda for a few years now may protest and say that the Euro spread is 1.2 and most majors are less than 2 pips. True, they are, and Oanda works great during non volatile sessions, but if you're active and the market is active, it causes problems for their "algorithms" and the platform locks you out or freezes (read thru their our forums). Plus, it takes longer for a MM platform to get back to equilibrium than trading thru an ECN - most ECN's return to normal within 30 secs to 2 minutes. MM platforms can handcuff you for 10-15 30 minutes, sometimes more. And if you are in a trade and can't access your account, tell me you are not worried. An ECN system will go down if their servers are no longer communicating with the banks. Since most ECNs have multiple clearing partners, if one bank feed goes down, there are always others. Which is better? Personally I find the ECN model better as it is more akin to trading as we know it (you buy INTL for a price plus commish, you sell INTL for a price plus commish) plus the costs to me are lower than trading thru a MM dealing desk. Also, with an ECN, you can trade larger sizes with ease than you can with a MM. My funds allow me (demand) that I trade in 1mil bcu lots, and this is easier than MM, which prefers 100k sizes. And because I am using the ECN model, I am more confident that the price has not been manipulated by some mook sitting in his cubicle on Water Street. Like bucket shops, not all ECNs are good; you have to do your due diligence to find the right situation. Check out this video about MM bucket shops to give you a better idea of why trading with them is a bad idea. You may have issues with the messenger, but the message is still important: http://www.youtube.com/watch?v=EQUlbxubHx4
ADM.. It's turning out to be a much shorter relationship than I anticipated, though I have yet to test their Hotspot and FXall feeds. cstfx - you might be more familiar with this as I'm getting some conflicting information. Do any of the instit. ECNs offer centralized liquidity, or are they all simply front-ends for existing bank pools as Currenex is? ADM is claiming that their feed in FXall and HS FXi is identical to their feed on CNX, but I was under the impression that those former ECNs were centralized.
As far as I know there is no centralized clearing for currency other than Fx Marketplace (space?) which is why you need a prime relationship to guarantee payment. Have you tried the retail HotSpot platform directly from Knight? 33% margin is still a good deal when dealing in size. You know what prime generally gives you and you can't beat this.
Ok so they're correct - the ECN platform selection doesn't matter, as it's simply a front-end for their liquidity pool. That will save me some time, since testing HS FXi & FXall on the same pool would be redundant.
I tested the demo, which seemed rather limited in terms of spreads vs IB. I also couldn't find a commissions quote on their website, which should be stated since it's retail.