There are many foreign exchange brokers in any active foreign exchange market), known as (Exchange Dealer) in the United States, just like the role of brokers in the stock market, foreign exchange brokers (Brokers) only act as intermediaries (Intermediaries) in the foreign exchange market The role of the company is to earn commissions, and its main task is to provide accurate and rapid transaction information to facilitate the smooth progress of foreign exchange transactions, and to negotiate exchange agreements for foreign exchange transactions on behalf of customers. It belongs to the relationship between buyers and sellers. Through the contact of foreign exchange brokers, directly or indirectly from the bank to buy and sell.
Forex brokers mainly act as a bridge between individual traders and banks. There are three operating modes of foreign exchange brokers, MM mode, STP mode and ECN mode.
Today we will introduce the three models of foreign exchange brokers, what are the differences between them, and what are their respective advantages and characteristics?
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Forex Broker MM Model
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1. The concept of a market maker
The MM model can be translated into a market maker, or a market maker. As the name implies, it is to create a trading market. It has a trading desk (Dealing Desk), that is, someone is involved in your transaction process, instead of automatically submitting your transaction request to the bank without hindrance.
Market makers make money on spreads and trade in the opposite direction to clients when needed. A market maker is to "make a market" and "create a market" for customers. Under certain conditions, when a trader wants to buy, the market maker sells to the trader, and when the trader wants to sell, he makes Market makers buy it. The trader sees that the buying and selling price is different from the actual price in the interbank trading market. In order to complete the trader's order, the market maker has the opportunity to reverse the transaction to control the price when needed. Because the competition in the retail foreign exchange market is very fierce, the prices offered by market makers are very close to the prices in the interbank market.
The market maker market generally includes two levels: the first level is the retail market between market makers and investors, and the second level is the wholesale market between market makers and market makers. Retail market makers are usually companies that provide retail foreign exchange trading services to individual traders. Interbank institutional market makers are usually banks or other large companies that usually provide buy and sell quotes to other banks, institutions, ECNs, and even retail market makers.
2. The role of market makers
Market makers play an important role in providing liquidity in the foreign exchange market, improving market transaction efficiency, transferring and sharing risks, and promoting market development.
We know that under normal circumstances, the daily fluctuations of exchange rates are very small, and small fluctuations require a large amount of funds to form objective profits. Therefore, the capital requirements for entering the inter-agency foreign exchange market are quite high.
However, sometimes, due to the limitations of business volume and internal liquidity, it is difficult to find a completely matching trader's buying and selling orders within itself for internal digestion of risks.
At this time, market makers can take the initiative to intervene and act as buyers or sellers as a last resort. In this way, the market maker acts as the counterparty to the transaction, buying a sell order from the trader, or selling assets to the trader to match his buy order, and the order transaction is completed within a few milliseconds through the trading desk. As an intermediary between buyers and sellers, it also "makes the market" for buyers and sellers. The important thing is that the market maker provides funds for the transaction. In the transaction, the market maker must first use its own funds to facilitate customer transactions Single transaction, in this way, solves the problem of asymmetry between buyers and sellers in terms of bidding time, and also eliminates any possible delays for traders in completing transaction orders.
In this way, traders can get quotes for buying and selling at any time, so the existence of market makers can activate the market, ensure uninterrupted trading activities in the market, and greatly increase the liquidity of the market, even if the market is at a low point.
3. Disadvantages of market makers
Since the market maker may intervene in the transaction and become the investor's counterparty, there is a potential conflict of interest between the investor and the market maker during the order execution process.
The cost of the buying and selling quotations they provide will be higher than the inter-agency quotations or ECN quotations to ensure that retail liquidation costs are covered and marginal benefits are obtained, but at the same time, in order to ensure competitiveness in the market, they generally float within the mainstream cost range of the market.
Some non-compliant market makers may manipulate prices, either preventing customers from triggering stop losses, or making transactions unable to achieve profit targets. Market makers may also increase their quotations, making the quotations far from the market price. However, the current market transparency is very high, and such behaviors are often questioned, and frequent occurrences will lead to a gradual loss of market reputation and share.
In the event of a risk event, customers may experience significant slippage. The market maker's quoting system and order setting system may be shut down during periods of severe market volatility.
However, this situation needs to be treated differently. At the compliant market maker, the slippage and system shutdown are replicated in the real situation of the inter-institutional market. In extreme market conditions, it is caused by the inability to obtain sufficient liquidity or the shutdown of the liquidity provider system , while at non-compliant market makers, abnormal slippage or system failure occurs when the extreme market does not occur, it is likely that its weak risk control system and financial strength cannot support it to continue to provide customers with Stable trading environment.
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Forex Broker STP Model
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1. What is STP
STP is the abbreviation of Straight Through Processing, that is, straight-through processing. After receiving the customer's order, the trader will throw the customer's order to the third-party liquidity place. However, most of the STPs currently discussed are often associated with brokers that provide STP services. Some brokers have dedicated STP brokers, while some brokers have dedicated STP accounts.
2. Types of STP
Generally speaking, there are two main types of STP: the main difference between the two is instant execution and market execution.
First, after the trader places an order at the broker, the broker immediately executes the customer's order, and then places the order at the third-party liquidity place for hedging.
Second, after the trader places an order at the broker, the broker places the order at the third-party liquidity, the third-party liquidity closes the broker's order, and the broker closes the trader's order. This STP model sometimes has another name called DMA (DirectMarketAccess), direct market access.
3. Key points of STP
First, liquidity. The most important consideration is the liquidity behind it. We know that STP brokers are in the mode of selling orders. Whether it is instant execution or market execution, STP brokers are only earning intermediate fees. The profit and loss positions of customers' transactions have nothing to do with STP brokers, but with STP brokers. It is related to the third-party liquidity behind the broker (it may also be the liquidity of the liquidity), so the quality of the third-party liquidity behind it often determines the quality of the trader's execution.
Second, the way of execution. Instant execution means that the order will not go directly to the market, but will be processed by the broker first. Market execution means that order information is sent to the market, and the price is determined by the liquidity providers in the market. STP brokers that provide market price execution provide customers with direct market access DMA (Direct Market Access).
Third, the spread type. STP foreign exchange platform with fixed point difference: the point difference is not adjusted based on the lowest buying and selling price among multiple liquidity providers, and the point difference is always fixed. STP foreign exchange platform with floating spreads: Liquidity providers provide the best buying/selling prices, and STP brokers will choose the best buying price from one liquidity provider, and choose the best buying price from another circulator. The bid price, so that customers can be provided with the lowest bid and offer spreads
4. Advantages of STP
Under the STP model, the broker’s profit model is only the spread and commission. For the broker, there will not be too much conflict of interest due to the customer’s loss, and there is even no conflict of interest in the case of STP/DMA. At the same time, under the STP mode, because after the transaction is completed, the net position is the same, so the market risk of the broker will be greatly reduced.
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Forex Broker ECN Mode
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1. What is ECN
Electronic Communications Network, referred to as ECN, electronic communication network. ECN electronic automatic matching transaction mode is an electronic trading network, which belongs to the advanced stage of electronic development in the financial market, and foreign exchange ECN is a foreign exchange trading technology that uses a centralized-decentralized market structure. This model is accomplished through close cooperation with banks, institutions, foreign exchange markets and technology providers. Traders' orders are directly and anonymously hung on this network, each order has the same status, and the transaction is matched fairly according to the optimization of price and time.
2. Forex market ECN
The ECN platform is divided into two levels in the foreign exchange field because of the foreign exchange market: the interbank market and the retail market, so ECN is generally divided into larger ECN platforms and smaller ECN platforms. Larger ECN platforms include EBS, Thomson Reuters, etc., while smaller ECN platforms mainly include Currenex, Hotspot, FXall, Lmax, etc.
3. Advantages of ECN
The main body of foreign exchange transactions are banks, investment banks, funds, multinational companies and other institutions, while the proportion of retail market transactions in foreign exchange transactions is relatively small.
In recent years, due to the substantial improvement in the cost of electronic technology, more and more retail investors have participated in foreign exchange transactions. Therefore, the threshold for the ECN model of foreign exchange transactions has also been continuously reduced, and more and more platforms have adopted STP, ECN and other technologies.
The biggest advantage of the ECN model is fairness, and it also has the characteristics of high transparency, fairness, efficiency, and anonymity.
Because the financial trading market is a market where two parties trade, you buy and I sell, fair trade, and equivalent exchange. In the MM platform, since part of the liquidity is provided by the platform, and the platform itself is our trading intermediary, it is equivalent to being both a referee and an athlete, so there is a greater incentive to create unfavorable situations for retail investors. Create more profits by yourself, for example, if you slide 1 point more, you will earn 1 point more. In the real ECN mode, since the platform is only responsible for transferring the customer's order and earning a handling fee, and the customer's order is traded with other counterparties in a unified trading pool, it has nothing to do with the platform, thus reducing the injustice of traders. Reflects fairness and reasonableness.
4. Key points of ECN
There are two main focuses of ECN: one is electronic technology, and the other is liquidity.
First, technology. The modern foreign exchange ECN platform provides access to the electronic trading network, and a steady stream of quotations are provided by the first-tier banks. The matching engine performs limitcheck and matches orders, and the speed is generally within 100 milliseconds. In the ECN platform, the matching is driven by quotes and there is a matching price for all orders. The spread is floating, but due to the competition of many banks, the spread between the US dollar direct market and the euro cross market is between 1-2. The order book is no longer a routing system sent to individual market makers, but a book that reveals the best quotations of real-time foreign exchange currency types. Through ECN, currency traders will benefit from more transparent prices, faster execution speeds, and faster Benefit from abundant liquidity, banks also reduce transaction costs due to less manual operations.
Second, liquidity. It is very important for an ECN, how to attract these liquidity. First of all, it depends on the quality of transactions executed by the trading center. First of all, ECN can gain a certain market share mainly because it can actively use the advancement of information technology to improve transaction quality, achieve better entrusted execution prices for brokerage customers than in the traditional market, and save transaction costs for investors.
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