STP/No Dealing Desk (Expert advice needed, please)

Discussion in 'Forex' started by PhilC, Feb 3, 2008.

  1. PhilC


    <b>Here is something I do not quite understand. Maybe some of the experts can answer some questions. I recently received an email from a company called GFS Forex & Futures, which I am not all that familiar with. They are touting a trading contest they will be holding next month. </b>

    <b>I went to their site to find out more information. I noticed a reoccurring marketing theme that many brokers have using, STP execution or "No Dealing Desk". </b>

    <b>I have been trading with FXCM and they offer the same "No Dealing Desk" gimmick. I have also held accounts with Oanda, Interbank and FXDD. </b>

    <b>I emailed GFS to ask more questions about "STP execution" because every time I ask FXCM I get a similar response, "we do not trade against our clients". </b>

    <b>But is FXCM telling the truth because I just do not understand? How does STP work? If they are using STP, why do I consistently get re-qoted market orders and slippage on my stops. </b>

    <b>I emailed GFS and this is the response I received. Is GFS correct? I am going to call this guy on Monday and ask more questions. If anyone has worked on a "Dealing Desk" or has owned a FCM for FX, your response would be very appreciative. </b>

    <b>Here is what I don’t understand. How can a FCM who claims to have “No Dealing Desk”, offer such low spreads, i.e. 1 pip on the EUR/USD?

    If Goldman Sachs was trading with Bank of America, the spread is 1-2 pips (EUR/USD). How can these firms offer 1 pip and No Dealing Desk when the true market (Interbank Bank) is trading at 1-2 pips? How do they generate revenue? </b>

    <b>I started trading with Oanda when I first got into FX. They use EBS, an ECN, and they claim on their website: “Except for residual amounts, we fully hedge our clients' positions. All the time. So there is no conflict of interest. We benefit most when our clients are profitable and we have nothing to gain when they are unprofitable.”</b>

    <b>How can Oanda generate revenue if they fully hedge their client’s positions (STP/No Dealing Desk) and charge 1-pip spreads? They are offering the same spreads as the Interbank market (Goldman vs. Deutche Bank) and they state “instant execution”. Also, how can they trade during the weekend? EBS/ICAP is closed from Friday through Saturday at 5PM. How is it they able to “hedge” their trades? I had stopped trading with Oanda before they started trading over the weekend. For Oanda traders out there, what are the spreads on EUR/USD during the weekend? If there are any Oanda reps out there on the forum, I would appreciate any input. </b>

    <b>If there are any reps for FCMs, I would be curious to hear their response to using STP versus lower spreads and an active dealing desk. Is the benefit a lower spread? A friend of mine works at FXAll. She agrees with the GFS guy. She said re-quotes and slippage was originated and standardized by retail brokers, using other markets, such as futures, as justification. There are far too many participants. With the exception of a catastrophic event, re-quotes and slippage, rarely occurs in the Interbank market, even during extreme volatility, such as non-farm payrolls.</b>

    <i>Dear Phillip,</i>

    <i>“We are a registered Futures Commission Merchant (FCM) or market maker in the spot Forex, Gold and Silver markets. Since our launch in 1999, our specialization has been on the Institutional side, working with CTAs, Hedge Funds, Broker Dealers, International banks, and other FCMs. More recently, we began offering our services to the retail industry, including carefully selected Introducing Brokers.</i>

    <i>We designed our proprietary platform, OperaFX, for professional traders, similar to an ECN platform without multi-bank access. The primary concern for professionals is speed and execution. Traders want to know the price they see on the screen is what they will be filled at. I am sure you would agree, re-quoted market orders and slippage on pending orders, i.e. limits, stops and entry orders, is not advantageous when trading the Forex market, or any market for the matter. </i>

    <i>Straight Through Processing (STP) execution eliminates the need for a “Dealing Desk”. Once an order is executed or triggered, the order is electronically transferred using our system (OperaFX) to our liquidity providers system (platform), each system communicating with each other’s Application Programming Interface (API). The benefit of STP is efficiency, speed and less human intervention. </i>

    <i>Brokers or FCMs who do not utilize STP must either take the opposite side of your trade or offset your position with another counterparty. In my opinion, if your broker is trading against you, this is a major conflict of interest. In a market that is trading $3.3 trillion per day, there is always willing participants. Even in volatile markets, consistently re-quoted market orders and slipped pending orders are infrequent when trading “bank to bank” or within the “Interbank” market. That being said, as a market maker, registered FCMs or FX Dealers can quote any price they desire. Obviously, if the prices they quote consistently vary from the actual price, arbitrage opportunities will exist and they will expose themselves to considerable risk. However, FCM dealers can and will capitalize and exploit their client’s weaknesses, using several practices, as mentioned above. </i>

    <i>If I can be of further assistance please give me a call or send an email. Thank you for your interest in GFS. Below is my contact information.</i>

    <i>If you have not registered for our Forex Trading Contest, please visit our website. The winner will receive a $5,000 Live trading account. For more information, including the Terms & Agreement, is located on our website.”</i>

    At the end of this email, it had the usual disclaimers plus “you must not distribute, copy, circulate or in any other way use or rely on the information contained within the entirety of this email.” I omitted the GFS Account Executive and all contact information for this purpose and avoid any problems. If there any lawyers out there, please send IM and let me know if I should post responses from reps from other FX brokers. I emailed a few other brokers (i.e Oanda, Currenex and Gain) the same questions.</b>
  2. its the retail forex they have the option either to take your trade because 95% of traders lose or can hedge it and in some cases pass you through(very hard to get a pass through you need to fill out due diligence on yourself have alot of capital 500k fill billion dollars worth of trades ect. 3 week process and still you might not be able to trade the real interbank market. all these companies if you read are most likely the counter party.
    the retail has the interbank prices but it is not the interbank.
  3. The aggregate book of Oanda can be net long or net short. The OP posed a question on how they hedge...

    ...since Oanda stays open over the weekend this question can be very important..more to Oanda than to its clients.

    Oanda simply buckets the trades...these are the offsets spoken about...they are their own counter party. This is where the money is made for Oanda on the spreads...

    Now...if Oanda does not hedge the NET AGGREGATE TOTAL (a total of all their longs and their book a net long or a net short) then the offsetting trades may dry up and they could hold a net book declining in value....this is why they go THE SAME DIRECTION as their net....

    Futures can be used to accomplish this. (also a not so publicized method used by many dealers called "netting")


    P.S. I am not an employee of Oanda, but once when I was a CTA I interviewed for a Forex Traders position at a dealer shop in California years the way there were shut down two months after my interview....I am so glad I declined.