As the interest in retail trading of foreign exchange continues to expand, so does the battle for brokerage firms attempting to capture those traders.
However, not every forex brokerage is alike. There are differences in the way they handle and execute trades, and each brokerage, obviously, touts their way as being the best. Every forex firm has a trading desk, but how that desk functions and how it is staffed are very different. Ridgewood, N.J.-based FX Solutions has only two or three employees on a desk per shift because of the efficiency of their technology, according to head of trading Michael Cairns.
“As the company and the market evolved, huge foreign exchange desks weren’t a necessity,” he says. “I know other firms have 30-person desks, and my question is, why do you need that many people? We have a scalable platform. All our customers are going to be treated the same, whether they have $500 or $5 million.”
Drew Niv, CEO of FXCM, says his firm has a 40-person trading desk. He takes issue with firms that claim to act as forex “ECNs” — meaning, they simply match customer orders with other customer orders — because he believes that model creates accountability issues.
“Since we are the counter party to all of our customer’s transactions, if a customer feels he was cheated out of a trade — a stop was missed or something like that — he can complain directly to us because we were on the other side,” Niv says. “When you are using a third-party trading desk, there is no accountability.”
FXCM and FX Solutions are firms devoted exclusively to forex. Other firms that are primarily futures brokerages but have added forex trading capabilities often handle things differently.
XPRESSTRADE, a Chicago-based futures brokerage, has a trading desk staffed with salespersons versed in forex trading. However, when it comes to the actual execution of the trades, XPRESSTRADE routes its orders to a forex market maker.
“If we wanted to do forex here we could,” says Dan O’Neil Jr., principal of XPRESSTRADE. “But our bread and butter is futures brokerage. Market making is a different game, so we wanted to leave that to a company [that specializes in that].”
Regardless, all firms agree they want to minimize the amount of human interaction that occurs in a trade. “Any time a human gets involved, it calls into question the integrity of your system,” Cairns says. “The fact there is a human involved means you’re not sure of your actual pricing. To be successful, you have to be getting the ultimate price. If someone is touching that price or there is somebody in between you and getting that price, to me, that’s a problem.”
Niv says that while extraordinarily large trades — trades worth tens of millions of dollars — must be handled manually, the majority of the trades at FXCM are executed without any intervention from the trading desk.
“Because we do so many trades every day, it is not humanly possible for a desk of 40 people to execute them,” he says. “Our system is structured to be an internal matching engine. The dealers don’t have control over spreads. There is an independent feed that handles spreads.”
While Niv believes a smaller trading desk can lead to increased human interaction, Cairns counters that by saying smaller is better — if your system is good.
“We are totally confident in our price discovery,” Cairns says. “We have heard of some companies that are continually monitoring the rates and ticking them up or down manually because they are not certain of pricing. If you get a re-quote or the price moves, you have to question why somebody needs 30 people sitting on a trading desk. “We manage our risk with scientific algorithms, so we are continually in the market offsetting risks. Our role for the trading desk is customer support. If somebody’s computer blows up, we can put on a trade for them, but we’re not touching our rates. We rely on our system. If you’re employing 30 traders, that money could be better spent making sure your systems are safe and secure.”
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