Electronic Communication Network (ECN) brokers are in the news more and more every year. This type of broker does not take the other side of its client’s trades, passing on all trades directly to a larger “liquidity provider” instead – in other words, a bank or other financial institution offers the trader’s contrary positions. ECN brokers make their money through commissions and spreads (the latter of which are usually low), and as they do not take the other side of their clients’ trades, do not profit when their clients lose and have no obvious potential conflict of interest with their clients. The same cannot be said of the traditional “market maker” broker model, which takes the other side of most or all its clients trades and relies for the lion’s share of its profit upon its traders losing money continually, or in determining which of its clients are competent traders or not, and covering accordingly.
There is no doubt that the “market maker” model is easier to offer, much more common, and offers a greater amount of easy profit. Yet in recent years we have been seeing a flow of clients to ECNs and brokers are now becoming more eager to offer this option. With recent news about FXCM, there is increased speculation as to whether broker claims to follow an ECN model are always strictly accurate. With this and some other issues in mind, we put some tough questions together for Andrey Kalashnikov, the CEO of Trio Markets, our top recommended ECN brokers for 2017.
All questions and conclusion:
Hi Andrey! We’d like to start by asking, who are your liquidity providers? Have you changed providers within the last 3 years?
We are working with LMAX Prime and Invast Global now. We have not changed them in the last 3 years.
Are you always able to route orders to the liquidity provider on your books currently offering the “best price”?
We aggregate the pricing and execution in our Liquidity Pool. Clients are always executed per the best bid/ask available in our Liquidity providers.
How did you cope with the Swiss Franc crisis in 2015?
We were a young broker back then. Luckily, we did not have a big exposure on CHF during the time of the incident.
What is the smallest quantity your providers allow you to buy from them in a single transaction?
We can send 1,000 (0.01 Lots) on FX symbols. This varies on CFDs, but in average the minimum would be 1 contract in most of major indices.
Do you have to make a market temporarily for odd amounts, or do you have an arrangement with your liquidity provider(s) to round them off at the end of each day for given prices?
I know some Liquidity Providers works that way, because it is not worthwhile to send the small amounts to the banks on the spot, therefore they temporarily make the market for small amounts until a considerable amount accumulates before they pass it to the bank.
Our license as Retail Broker does not allow us to do such thing. We must transmit the orders on the spot. We cannot make the market even for a second.
What software do you use to process the transactions between your clients and your liquidity providers? What are the major technological challenges you face?
We are working with PrimeXM. They are the leading Liquidity Bridge Provider in the Market. Their XCore technology allows any trade to reach the Liquidity via FIX API. Also, delivery time of the order is very quick which gives us a superior execution.
The major challenge is the question about the future of MT4 Trading Platform. Metaquotes is very determined to replace it with MT5 and it will be a great challenge to adopt all our technological infrastructure to the new trading platform.
Trading awareness is growing and there is great hunger for new things. Traders are constantly looking for better and faster execution together with transparent liquidity which pushes us to add different platforms such as CTrader, Ninja Trader etc. Each additional trading platform brings the challenge with it.
Do you think that brokers offering a market making model will find it more difficult to comply with regulation in the future? Could it be that market making models will become viewed as unacceptable over time by governments and regulators?
At the end of the day, there is a price tag on the market making licenses and there will always be brokers willing to pay the price.
It is certain that regulators will make things tougher and there will be more monitoring on broker activities.
If there are checks on the system and brokers realize that they have no other option but playing fair, there is no reason to make it unacceptable.
What is the strongest demand you see these days from your clients / potential clients?
Fast withdrawal, quick response, good service, fair execution and competitive trading conditions.
Do you think a client ever has a logical, good reason to prefer a market maker model to an ECN model?
Clients are aware that market makers are making their money from client’s back which is a very disturbing fact for them. I think this is the major reason why people would choose ECN model over market makers.
What are the main reasons you do not offer trading in CFDs on individual shares?
We only work with Liquidity Providers which we have no doubt of their credibility. It is not easy to find one that will meet our high demand and offer a wide range of products including the equities.
It is much harder to find the right technology and know-how to integrate yourself with stock exchange.
Nevertheless, I cannot name it, but we have started the process and we are hoping to offer the shares in the near future.
Thanks for your time Andrey, it was interesting for us to hear your take on these issues and get a window into your business.
What we thought was most interesting about Andrey’s answers was firstly his frankness in sharing the basics of his business model. Many ECN brokers will not name their liquidity providers, and this is often a good sign that the broker doing so is not a “true” ECN, which is disappointing for those searching for the real advantages which can be gained by using an ECN broker. Andrey also confirmed that every single one of his client’s orders is sent straight away for processing – there is no market making at all, not even temporarily. Secondly, looking at the industry entirely, Andrey thinks the ECN / market maker model split will always continue, with the market offering a niche for both types. He also mentions the coming phase out of Metatrader 4, the most popular platform with retail Forex traders globally, which may impact both types of brokers in the very near future.