Forex and CFD markets explained
- What is ECN?
ECN (Electronic Communication Network) is a technology of automatic organisation of trade of financial instruments wherein several sources of liquidity (Banks) are connected to one electronic system through which purchase and sale operations are conducted.
- How ECNs are related to Forex?
They are directly related. In a sense, that very legendary “intrabank” that dealing centres are so fond of telling about, consists mostly of ECNs.
- What is the difference between trading through ECN from trading through Dealing Centre?
Unlike DC, a company that provides you with the access to ECN (hereinafter: ECN broker) is not in a conflict of interest with the client. THIS IS IMPORTANT! Unlike DC, ECN broker earns solely by the commission it receives for each transaction carried out by the client. Unlike DC, ECN broker automatically directs every transaction to the counterparty (bank), which has exposed the best quote at the moment. At that, opening and closing of the position can fall on different counterparties. Certain ECNs even allow selecting counterparties for a transaction regardless of whether they have the best quote or not.
Thus, the profit of the broker does not depend on whether the client wins or loses. This eliminates a major conflict of interest which is common for working with DC.
- Features of ECN broker:
- The ability to access well known ECNs (Currenex, LavaFX, 360T, IntegralFX, LMAX, etc.) - condition sufficient, but not necessary.
- Possibility to see Level II - a window in which all limit orders of all participants in the system are displayed, ranging from large banks to orders of own ECN clients.
- Possibility to change quotes visible to all ECN clients by means of its order delivered within the spread.
- Broker generates revenue through the commissions from the transaction.
- There are no fixed spreads.
- Differences in the trading process between ECN and DC:
- Typically, the spread on ECN is much narrower than in DC. Broker receives fixed fees.
- There are no restrictions on scalping or pipsing.
- It should be noted that despite the narrower spread in ECN, quotes jump very quickly. In the absence of a dealer who soothes the feed, for an unaccustomed person it may seem that the ECN is more volatile. This is not the case. ECN is just a market as it is. No re-quotes. At all. But it is better to use the limits 0.1 pips higher or lower than the best quote in the order book. Good performance is guaranteed.
- No guaranteed orders. Guaranteed order is, de facto, an option that can only exist in DC conditions.
- Which is better: ECN or DC?
Depends on the trader. If a trader is ready to put up with the possibility of off-market quotations, with the fact that the dealer can move the price, that the positive slippage will never be as frequent as negative (if at all) and longs for the comfort of guaranteed stops and fixed (not always) spreads, then he doesn’t need ECN. If the trader prefers to gain access to the market through a company that will not complicate the difficult in itself process of profit-making, then perhaps ECN is better in this case.
As such, the global FOREX currency exchange with common rules of trade and services does NOT EXIST! On the exchange it is possible to trade currencies only in the form of a futures contract, or in the form of contracts on local exchanges of individual countries, with the possibility to get there the actual delivery of currencies by importers or exporters.
There is an interbank FOREX market, where the world's largest banks, i.e. the market makers of this market, buy and sell to each other real volumes of currencies, which then are transferred to the accounts of manufacturing companies around the world. Purchase and sale is conducted through specialized inter-bank trading systems within which transactions are made based on actual delivery of currencies. The largest of these systems are the Reuters Dealing and Electronic Broking Service (EBS).
The first electronic brokerage system was Reuters Dealing. This brokerage system was designed for the spot Forex market and was presented in 1992. At that time it was a revolutionary breakthrough technology, as Reuters Dealing 2000-2 Spot gave an opportunity to obtain quotations of currencies in real time on a large number of currency pairs. The next step in the development of technology was the launch in 1997 of the brokerage Reuters Dealing 2000-2 Forwards. As the name implies, the feature of the system was the ability to enter into forward transactions. And in early 2000 a new electronic brokerage system Reuters Dealing 3000 was announced.
Reuters Dealing system has a strong competitor - Electronic Broking Service (EBS), which is an automated system of currency dealing. It was created by a consortium of several major banks that were members of e-commerce together with Quotron company, which specialized in research in the field of IT. The project started in 1993. To date, the EBS electronic brokerage system includes many world`s major banks, including such well-known institutions like Bank of America, Commerzbank, Barclays Capital, Lehman Brothers, UBS AG. In addition, special place is held by the Japanese company Minex - a joint project of KDD and Dow Jones Telerate. Electronic broker EBS provides a full range of dealing services to the interbank market. And EBS Spot Dealing System is one of the leading anonymous dealing systems designed for trading in the Forex market. To date, about 900 banks of the world use this system.
Besides, over the past decades, so-called ECN trading systems started to take off at a fast pace both on the exchanging and OTC markets. The most famous and largest ECNs for currency trading are Currenex, Atriax and FX Alliance - FXall.
- Currenex is the first independent and open ECN, which connects buyers and sellers of foreign currency around the world. It was established in 1999 in California, and now has offices in Chicago, New York, London and Singapore. Only entitled persons, who received membership of this exchange, can participate in the bidding through Currenex. Banks, treasury departments of companies, managers of corporate finances, government agencies, international organizations and central banks can be members of Currenex. Currently, the members of Currenex are such powerful corporations like Autodesk, Compaq, Ericsson, Intel Corporation, and about 40 global leading banks acting as market makers, including ABN Amro, Barclays Capital and Merrill Lynch. Currenex provides bidders with a complete complex of electronic services, called Straight Through Processing (STP), which means full automation of the sales process - from the placement of the order by the client to its execution and performance of all settlements. Currenex holds biddings around the clock in real time, providing their participants with instant access to the foreign exchange market with a daily turnover of over $ 1.5 trn.
- Atriax is one of the youngest of the world's leading ECNs. It was established in the UK in June 2001 and headquarters in London. In view of this, it is subject to the law of the United Kingdom of 1986 "On Financial Services", and the exchange itself is under the supervision of the state body regulating financial services. Atriax is an independent company, whose major shareholders are such corporations as Citibank, Deutsche Bank, JP Morgan and Reuters. In contrast to Currenex, which can trade any currency of the world, Atriax trades 43 currencies. Bidders may obtain quotations of the currency of interest to any other currency, traded on the exchange. Spot foreign exchange transactions, forward transactions and swap transactions are conducted on Atriax. ECN divides the bidders into price-makers, the participants determining prices on the market of foreign exchange and price takers, i.e. participants accepting the prices offered by the price-makers. There are always around 60 price-makers on Atriax, including such powerful participants of foreign exchange markets as Citibank, Deutsche Bank and JPMorgan.
- FXall is an electronic organizer of trading on the foreign exchange market, which started its work in May of 2001 with the launch of a fully automated trading portal. This exchange has several offices in New York, London, Tokyo and a representative office in Hong Kong. Treasury departments of companies, managers of corporate finances, hedge funds, central banks and other institutional clients can make use of FXall services. In order to trade at FXall, these organizations need to have an agreement with exchange members, i.e. with its market makers.
In organized exchange markets ECN technologies have found even more wide application. Those interested in the stock markets of the U.S.A. are familiar with the names ARCA, ATTN, BRUT, BTRD, INCA, INET, ISLD, REDI, SDOT, etc., through which the majority of stock market are being traded.
FXFINPRO Capital company is not a dealing centre and all positions of the clients are brought directly to ECN, where the counterparties of our clients are the market makers of world-wide reputation, such as ABN Amro, Barclays Capital, Deutsche Bank and JPMorgan.
- FOREX Asian session
Night 00-00 to 6 a.m. (Moscow time). In these hours mainly Asian and Oceania countries trade, where Japan, China and Australia are the main players. For the most part, trade during this time is not very active, big movements are rare. There are cases of relatively big movements of profile Asian currencies, with the exit of important data in Japan, Australia or New Zealand. This occurs typically at 3 a.m. or 4 a.m. Early morning hours, from 6 a.m. to 9 a.m. are one of the quietest periods of trade, since the Asian FOREX session is coming to an end, and the European traders are only waking up.
- FOREX European session
Morning from 9 a.m. to 12-30 a.m. One of the most critical periods of trade. Europeans have already woken up, someone has already started working, currency speculators become active. Usually, at this time the movement, dominant throughout the following day, is born. It is recommended to carefully monitor the market at this time and pay attention to the fact that the important statistics for the euro-zone comes out at 12 a.m. – 1 p.m.
Day period from 12-30 p.m. to 4 p.m. From 12-00 p.m. British traders enter the market and pounds trade comes forth. As a rule, from 1 p.m. to 2 p.m. the important statistics in Britain comes out, which can move the market in one direction or other. In most cases, the movement that originated in the morning survive by this time, but there are exceptions caused by statistical data of Europe or the UK.
- FOREX American session
Evening, 4 p.m. to 9 p.m. The most "hectic" time at FOREX. The American banks, large hedge funds, investment banks and funds are joining in with the global exchange process. Entry of large financial resources into work during the U.S. session can reverse any movement that existed from the morning and establish its own. Almost all important news in the United States come out at 4-30 p.m., Moscow time. It is recommended to take into account their availability as of each specific day, their importance and the so-called sentiment-mood and the background of market expectations in whole. After publication of news, the market can be moving very actively. Closer to 9 p.m. the activity is gradually decreasing.
As such, the market for foreign exchange transactions FOREX (from the English foreign exchange market) existed a long time ago and its main purpose is not to maintain speculative traders, but to maintain the world turnover of products and services. FOREX - in fact, is the circulatory system of the world economy. International firms, companies, banks and other organizations constantly need to change money at the market rate of exchange. FOREX market, which is designed for this purpose, helps them to do this. And indeed this market provides a set of various trade, investment and speculative operations with currency. FOREX became a household name a few decades after the change of the Bretton Woods system of fixed exchange rates to a system of floating exchange rates of national currencies, when it became possible to exchange one currency for another without a strict peg to gold. As a result of these transformations Central banks have acquired the ability to impact the formation of the national currencies, thereby affecting the economic situation in the country. During this time, the market has become a complex and multi-faceted structure. But it is important to understand that FOREX market is not an exchange market, but an OTC (over-the-counter) market of FX transactions, being a world-wide protected specialized network in the nodes of which there are small and large transnational banks and various electronic trading systems (ECN). These banks perform the major foreign exchange operations on the instruction of exporters and importers, investment institutions, insurance companies and pension funds, hedgers and private investors. And those, so-called dealing centres, through which the majority of traders sell, are the same clients for banking corporations as any other company such as IBM or SONY. These banks also conduct operations for their own benefit and at their own expense: at that, daily transaction volume of major banks amounts to billions of dollars, and some banks even have a significant portion of profits generated by the speculative operations with currency. Apart from banks, the brokerage houses are active participants of the market acting as an intermediary between a large number of banks, funds, commission houses, dealing centres, etc. Commercial banks and brokerage houses do not only perform transactions of buying and selling currencies at prices that other active participants set forth, but also offer their own prices. Thus, they actively influence the pricing process and the life of the entire market, that is why they are called market makers.
In contrast to the active participants, the passive market participants cannot set forth their own quotes, and they purchase and sell currencies at the prices offered by active market participants. Passive market participants generally pursue the following objectives: the payment of export-import contracts, foreign manufacturing investments, opening of branches abroad or establishment of joint ventures, tourism, speculation on the difference in rates, foreign currency hedging, etc.
Central banks go to FOREX, as a rule, not for profit, but in order to verify the stability or correct the existing rate of the national currency, as the latter has a significant impact on the economy of the country. Central banks are also entering the foreign exchange market through commercial banks. Although profit is not the main objective of these banks, unprofitable operations do not attract them too; therefore the intervention of central banks is usually disguised and carried out through several commercial banks at once. Central banks of different countries can also carry out joint and coordinated interventions.
If active participants make transactions with large sums of several million dollars, passive participants can use leverage or margin trade. Using a small security deposit they are able to temporarily operate the capital exceeding it by hundred times. This method of trading, usually through one of the so-called dealing centres, lets small investors with minor capital participate in the foreign exchange market and still make profit or loss.
A dealing centre is a non-bank entity that executes operations with foreign currency traders on its own behalf and at its own expense. Dealing centres receive quotes from information systems (Reuters, Bloomberg, etc.), several sources of quotations are usually used for the formation of a consolidated stream. On that basis their own quotes are formed and transmitted to their customers through trading platforms. Trade through dealing centres is usually conducted using Internet as a communication system. Immediate actions are performed with the help of specialized software, or by phone.