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Abstract:Which dealing models worked the best over time, and which model should a broker choose when entering the FX/CFD industry?
The retail FX/CFD industry has over two decades of history.
The market-making model still dominates.
The retail FX/CFD industry is more than 20 years old. While most of the well-known brands started out at the turn of the century, some were established even earlier. All of them started as ‘market makers’ creating markets for their own clients. Then industry became fascinated with STP models, no-dealing desk and ECN (Electronic Communication Network). So, where is the FX/CFD industry today?
At the beginning of 2022, we have an industry full of technology providers and different solutions. Setting up a brokerage is an easy task. Yet, at first, brokers did not have so many options to chose from. Initially, brokers, whether they wanted it or not, were organizing their operational side of the business according to a model which today is often referred to as ‘B-Book’(or market-making) all alone. The history of retail OTC trading starts with this model. But, the future was to bring another option.
As the FX/CFD industry grew, new forms of dealing desk organization appeared on the scene. We had both turnkey solutions as well as complex brokerage systems using several elements. But, real popularity was gained by the term ECN (electronic communication network). The idea of ECN was nothing new. It was already used on stock exchanges in the ‘1970s’. And, it was already known in the FX market in 1999. However, it was used mostly by banks and institutions.
The retail industry had to wait a few more years. For example, FXCM introduced a ‘Non-Dealing Desk’ model in 2009. As the broker explained at that time: “Every ‘No Dealing Desk’ trade is executed back to back with one of the world's premier banks or financial institutions, which compete to provide FXCM with bid and ask prices.”
The same year the first MT4 based ECN account was introduced by FX Open. What was revolutionary in ECN trading was the fact that simple retail traders could actually make trades against multiple sources of liquidity. The same thing happened in 2009 and in 2010 when the industry witnessed a massive explosion of ECN accounts and new brokers. But, did it change the game for retail traders as was hoped?
Damian Bunce, the Chief Trading Officer at Exness, summarized the benefits of the traditional Market-Making model for us this way: “We can design trading products and conditions that are more competitive than those available on the general market. We can protect against large price gap events which is a huge benefit to clients in very uncertain volatile markets. We can also prevent information leakage meaning there is no market impact, and since we create the market, our volumes available to trade at top of book are much larger than on exchange. So, for very large orders that would take out many levels in the order book our pricing for volume is better. A private liquidity venue removes signaling risk and information leakage which we know pervades the markets with small ‘top of book volumes’ where HFT strategies have speed advantage to capture liquidity.”
Disclaimer:
The views in this article only represent the author's personal views, and do not constitute investment advice on this platform. This platform does not guarantee the accuracy, completeness and timeliness of the information in the article, and will not be liable for any loss caused by the use of or reliance on the information in the article.
CM Trading is a South Africa-based online broker operating for 10 years, providing trading on Forex, Commodities, Indices, Stocks, and some Cryptos. Among many forex broker options in South Africa, CM Trading struggles to be the popular one due to its high costs for live accounts and wide spreads. Instead, it is considered an expensive broking. To open a live account, traders need to fund at least $299, less friendly to beginners. However, CM Trading compensates for this by offering large amounts of bonuses up to $150,000. Notably, CM Trading does not provide any popular copy trading solutions.
FBS, more of an A-Book broking company, offers trading services through its three entities in Belize, Australia, and Europe, respectively. With the FBS platform, traders can get access to over 550 CFD-based instruments, including Forex, Indices, Energy, Stocks and Cryptocurrency through the FBS App and MetaTrader suite—MetaTrader 4 and MetaTrader 5. FBS's shining features, an extremely low entry barrier from $5 and its generous leverage up to 3000:1, attract active traders the most. competitor However, FBS does not provide tiered account options, only one live account offered for all investors, but opening an account here is quick and easy. FBS's copy trading solution—FBS Copytrade, while once available, isn't as user-friendly or prominently featured as those offered by competitors, closed in 2022, restricting beginners' access to simpler trading approaches.
Eightcap, a well-established online trading broker, has gained great popularity among retail investors in the middle of its launch. Unlike many other forex brokers, Eightcap is not just a MetaTrader forex broker, it come with focus on Tradingview and automated trading through Capitalise.ai. Eightcap provides a narrow range of trading instruments overall, only 800 CFDs across Forex, commodities, indices, shares, and cryptocurrency derivatives, comparably limited choices for more seasoned traders. Three account types are on offer, no minimum deposit tiers, all starting with $100, and to enhance trading flexibility, a generous leverage of up to 500:1 is provided. Scalping is also allowed on this platform.
Instaforex is a well-established international Forex broker serving a global clientele through its international entity in Belize and European entity in Cyprus. This online trading platform, targeting both beginners and experienced professionals, offers a great variety of tradable instruments, covering forex, stocks, commodities, indices, and cryptocurrencies. InstaForex's unique feature, ForexCopy, is a popular copy trading system that enables traders to automatically replicate the trades of successful investors. Besides, Instaforex offers a PAMM system where investors can allocate funds to be managed by experienced traders. And its unique OYS portfolios, a service intended for diversification of clients‘ investments. Based on the Copy mechanism, the service allows traders to copy OYS Portfolios, which are trading accounts comprising an asset or a group of assets managed by the company’s specialists. InstaForex provides access to popular trading platforms like MetaTrader 4 and MetaTra