Thread: So... it turns out that Market Maker models arent that bad

Originally Posted by ;

.. .afterall Looking around now, the brokers which are standing are largely market maker brokers. People who are Alpari etc, ECN, FXCM seem as though they are going under. The motive seems to be that at the MM models, the brokers are the counterparty, when you lose, they win. But with ECN brokers, since they pass you on the main market through their liquidity suppliers, they assume the risk if their customers accounts go bust, so they wind up owing their liquidity providers. This is why FXCM owes 225million. So far as I can tell.

Based on FXCM's announcement clients experienced significant reductions, generated negative equity accounts owed to FXCM of about $225 million.

I'm taking that to mean that 225mio are negative customer balances owed to FXCM (i.e. margin calls which customers are incapable of fulfilling ), thus the FXCM's shortfall.

Originally Posted by ;

The point being that because of what occurred yesterday, traders shouldn't blindly think that any MM is better than an ECN because it seems like that is what a good number of recent articles on these forums are insinuating.

100% agreed. I'd like to consider it this way Considering EURCHF went south, the MM brokers came out smelling like roses. But if the rate had gone north at the speed and intensity, those exact same MM brokers may have been regarded as Ponzi schemes of the kind.

I believe bro Skenobi created a point.

The ultimate cause is Implementing. These wont that is most likely happen if minding are avoided. And these brokers won't risk traders from incurring losses on them due to their individual losses.

Originally Posted by ;

quote According to FXCM's announcement clients experienced significant losses, generated negative equity accounts owed to FXCM of approximately $225 million. I am taking it to mean that 225mio are unfavorable client balances owed to FXCM (i.e. margin calls that clients are incapable of meeting), hence the FXCM's

Yes however when fxcm owes money to their liquidity supplier on behalf of their clientele.

If there clients say they are bankrupt, and not able to pay, which I am certain many will, then fxcm has to consume the reduction.

That's what iam saying

right?

Originally Posted by ;

quote I believed the ECNs where greater too, shows what I understand.

I STILL think ECNs are much better than an normal MM since MM can go bust anytime their winning traders win over what winners have lost they can play tricks too but ECNs are at risk during rare occasions such as the one we have witnessed. As I've said the best option for traders are MMs who are good at recongnizing traders passing their trades to LPs while keeping the trades of losing traders. Or might be the ideal alternative would be ECNs who are extremely vigilant in managing their risk under exceptional conditions such as the other, be it by lowering leverage for high-risk pairs or by buying some sort of insurance to protect your clients' funds in the event of unforeseen conditions.

Unlike most traders, I've never actually had some difficulties with MM version but it's the honesty that I care about. If a MM is taking the other side of losing traders afterward earning money from it then that's fine with me so as long they are not really playing tricks such as widening spreads to hit SLs, not honoring people's TP, delaying withdrawals, commingling clients' funds, etc it's just that it's not always easy to sort out the good bad MMs.

Originally Posted by ;

100% agreed. I'd like to think of it this way as well: Since EURCHF went south, the MM brokers came out with their asses smelling like roses. But when the rate had gone north at precisely the exact same rate and intensity, those same MM brokers might happen to be regarded as Ponzi schemes of the kind.

I am not sure if it moving north in a big manner would have made a difference. MMs are at risk whenever their winning traders win more money than the money that they'll be getting from their shedding traders, it's independent of where the market moves while ECNs are at risk any time there are exceptional moves in the markets with a lot of traders ending up with a negative balance, in addition, it is independent of where the market goes.

Originally Posted by ;

Isn't it that after MM broker hedges in inter-market things become no different than for an ECN broker? MMs can settle trades but that makes for utilization of another marketplace.

Truly, a smart MM will hedge trades of its profitable traders on the interbank or with his liquidity-providers because he'd have to pay the profit from his own pockets.

Originally Posted by ;

I think bro Skenobi created a stage. The cause is currently leveraging. These wont that is most probably happen if minding are averted. And these brokers will not risk traders from incurring losses on them due to their losses.

You're right in that leverage is among the main problems on nowadays but there would be no retail Foreign Exchange without leverage since Foreign Exchange market deals in amounts that are way past the trade-capital of an average retail Foreign Exchange trader so getting rid of leverage or substantially reducing it would have detrimental consequences on the presence of retail Foreign Exchange overall liquidity resulting in wider spreads. However, what good brokers can think of doing is to reduce leverage for particular high-risk pairs, for EURCHF it had been reduced by Dukasopy to 10:1 such as, or they could find a way to insure clients' deposits.

It seems like there a lot of misunderstanding going around about the distinct retail broker business models.

The sole reason edued traders demanded any version like ECN, STP, etc. (business models in which their retail broker passes trades on to liquidity providers) as opposed to the conventional MM/dealer version (bucket shop/casino) is conflict of interest.

Nothing more, nothing less. Are there other advantages/disadvantages? Of course.

The very first generation of retail Forex brokers (and that's using the term broadly, don't hesitate to substitute bucket shop or casino) were simply streaming prices in the interbank market as a guide. So they basically show you exactly what the boys are trading a currency pair at, and they let you buy and sell FROM THEM. Those trades never go anyplace else, least of all to a bigger bank that trades with other major banks. This was the MM / trader version.

Here's the simple idea you need to understand: Whenever you buy or sell any currency pair, your broker is ALWAYS about the other end.

Which appears to cause a lot of confusion for beginners because when they hear that their broker is trading against you, they envision that when you buy EURUSD, the broker needs to do something like sell the EURUSD. No, they do not. They did... TO YOU.

Example: In 2:00, you buy EURUSD. In 3:00, you sell EURUSD. If the EURUSD price goes up 10 pips, you win 10 pips and they shed 10 pips (they owe you the profits.) The broker never needed to make a single transaction with anybody else for this to be true. If it'd dropped, you owe the profits.

What is the gap with ECN/STP/etc. Models? (Ones in which the trade is passed on.)

Only 1 thing: When you buy EURUSD at 2:00, the ECN/STP broker (supposing they're actually placing your trade through automatically and indescriminately as advertised) simultaneously buys the SAME AMOUNT of EURUSD from one of their liquidity providers. (A prime broker or bigger institution that's further up the series in the FX food series.) And at 3:00 when you sell your EURUSD position, they also set a sell order of the exact same amount through to the liquidity providers.

The main differences?

1) They actually don't have any conflict of interest with you even if they technically are the counterparty (most are and disclose as much in legal documents)

2) They actually need to do something when you do something (you buy 1 of something, they buy 1 something; you sell, they sell -- they themselves are not exposed since the amount they owe to the liquidity supplier = the sum you owe them OR the amount they owe you compared to the sum the liquidity supplier owes them.) Thus, no conflict of interest. The spread may widen a little on your side in an STP version or charge you a commission in an ordinary ECN version, or another method of reimbursement based on your volume although not based on if you win or lose.

The irony here is that FXCM and Alpari suffered for doing things right for the most part. (Of course, that was not always the case -- that is the reason FXCM has such a terrible reputation among many seasoned traders.)

What happened on Thursday was the true interbank market actually lacked the participants to take the other areas of trades (the systems utilized to quote between the very top of their FX food series went down through it -- freezes in MT4 and other retail platforms are only a domino effect of that, and peanuts compared to the sort of money at stake on very top.)

The other misconception is that there appears to be this notion that prevent losses are a software feature and everybody becomes confused when they do not activate. They're orders. They're a lot like registering a bit of paper that says If it doesn't begin raining by Friday, take me. If someone in Southern California declared that stop loss order they'd probably be shot -- assuming other men and women are around to do it. However, if there is a major earthquake that takes everybody else out (equal to Thursday's liquidity situation in FX) then who's around to take you?

In ECN/STP models, you actually require someone else to do it. In MM/dealer models, they will be delighted to take you themselves

Anyhow, this Thursday failed create a rare situation where brokers that have an immediate conflict of interest with you proven to be better (for the clients who had no direct position in CHF pairs)... because when you (if you traded CHF) and the rest of the clients who did the very same drops to zero, they have your cash. All they need to do is keep it.

For ECN/STP, if the exact same occurs, they themselves owe that loss to liquidity providers though you owe them. (Customer loses $X sum in CHF transfer; ECN/STP broker automatically had that equal trade put through for their liquidity providers so they themselves owe that same $X minus commissions/widened spread into the liquidity supplier.)

Of course, when thousands of clients' accounts go negative, even if they don't guarantee against adverse accounts (because nobody has been on another wide of the stop loss trades -- ie. Nobody there to take you), it is not just practical for them to sue for the small quantities each client owes, so they end up simply owing the liquidity supplier whilst none of the clients will pay them .

It's not that far better for you if you traded against the CHF move since, 1 way or another, you lose your cash. If you just happen to be one of the other clients who DID N'T trade is while your peers 23, it is just worse. (Because the broker holding your account may be insolvent.)

So yeah, this is a rare situation but in general, it is probably not a fantastic idea to stay with MM/Dealer brokers as a guideline if there is any chance they will act in their conflict of interest (and most of us know many do -- delayed quotes, leaning, artificial slippage, etc. . up to far worse compared to commission and STP widened spread costs.)

Originally Posted by ;

quote It's comparable saying that presence of mortgages and credit cards is accountable for defaults on people. No issue, no product. Smart!

Anyhow, I dont take offence, so I expect others dont.It depend on the way you look at it. If those brokers who don't have capital or liquidity to handle so much leveraged accounts, they should have managed their risk well. It is like brokers that are well capitalised took it as a blink of eye. It is comparable to people, retail traders.Those that have a betting account, will even be aware that the book maker cap their payout once they winnings should transcend the payout.
It is quite similar to accepting or giving out loan also, no thing in a business or personal perspective. Can you Or your entity able to manage it when something happen.

Hello. I had been wondering about prevent losses from the options world. In a call or put commerce, the reduction stop reduction or would be the premium paid. Can there be a worry that someone can go into negative equity in such trade? I'm not exactly sure the OCC governs MMs and liquidity suppliers or who. (?)

I have been considering moving into options especially now with liquidity suppliers quoting way way under eurchf's supposedly flooring of 1.2.