ForexSpirit

FXCM has been making a big deal of its no dealing desk model, with a press release last week stating that 99% of their clients are now using this system.

As far as I can tell, there is no noticeable difference for the average retail forex trader on the new no dealing desk as compared to what FXCM had in place before. If you weren’t trying to take advantage of FXCM’s price feed, which is most often done by trying to trade news releases, then the switch from one fully automated trade execution system to another was hardly going to be noticeable. I’m not a current FXCM client, but I wonder if clients were informed of the switch over and if any of them were able to tell the difference?

The ‘no dealing desk’ name seems to be an attempt to brand their trade execution backend and link it somehow to non-dealing desk systems.

I have nothing against dealing desk brokers. As long as I know that the broker uses a dealing desk model, whereby they earn money on the fixed spread, I have no issue against them.

In using the no dealing desk nonclamature, FXCM seems to be sidling up to the term non-dealing desk, which is also often referred to an Electronic Communications Network (ECN). On an ECN trading system, the broker does not earn any money from the spread available on any given currency pair. The ECN broker offers straight through pricing. It offers the exact same pricing its receives from the banks and other institutions that it is partnered with. To make money, the ECN broker charges commissions on each trade.

The very fact that FXCM’s no dealing desk still offers fixed spreads means that it is not an ECN. With an ECN the spread can vary, even dropping to zero or a negative pip spread. With an ECN you can also gain access to the depth of the market (often referred to as Level II), where you can see the total volume of the bids and offers in the market currently available.

With FXCM as the largest retail forex broker out there, I don’t understand why they don’t just move to become a proper non-dealing desk broker. If retail forex brokers have any chance of throwing off the bucket shop persona that exemplifies far too many of them, in part due to the largely unregulated nature of the forex market, then only by moving to an ECN do they have any chance of showing true legitimacy.

I think it is inevitable that FXCM will have to go down the ECN route. All other markets have ended up this way, and competition between brokers will force their hand eventually. EFX are already leading the charge and I fully expect more retail forex brokers to move in this direction in the near future.

The FXCM press release stated: “In effect, we have now ended our dealing desk trading system, thereby removing any possible conflict of interest.” Until FXCM offer a full ECN system, and charge a commission for each trade being executed, there will always be the possibility for them to have a conflict of interest with their clients. Every time that they offer a client a spread that is wider than the current true market spread (as offered by the banks that give them price feeds) they have succumbed to a conflict of interest: they have manipulated the bid and offer prices so as to include their spread fee.

Another smoke and mirrors claim in the press release states “FXCM expects the number of banks that provide streaming prices for No Dealing Desk execution to increase from 6 to 9 in coming weeks. FXCM believes this will lead to consistently lower spreads.”

Since FXCM make money on the spread, I fail to see having more bank feeds will reduce the spread. Having more bank feeds may indeed result in more consistently low spreads being fed into FXCM but there is no cause to believe that it will be in turn passed on to FXCM’s clients.

The only real way I can see FXCM reducing their spreads, especially on the majors where spreads are already very low, is if FXCM increases their customer base. With more customers putting on more trades they are able to reduce the spread without losing any revenue.

I’m sure that FXCM are very happy with their new trade execution backend systems, but trying to parade it as something that it really isn’t doesn’t do them any favours.

FXCM are one of the largest retail forex brokers, with over 90,000 customers, so they must be doing something right. I hope that they’re keeping their software developers busy; perhaps with an ECN?

For further commentary on the FXCM press release, check out the Forex Non-dealing desk blog.