FXCM has released a study it conducted that claims that clients on its retail platforms are able to achieve better FX pricing than on either the futures or interbank markets.
Using the CME, EBS BrokerTec and Thomson Reuters FX platforms as a benchmark, FXCM claims that pricing on its platform was equal or better than the futures price 90.83% of the time and equal or better than the interbank market 95.31% of the time over a period from October 1, 2014 to August 31, 2015.
The reason why FXCM was able to achieve better prices for its retail clients, according to the study, is because its liquidity providers are only allowed to be price makers on its retail client stream.
“On FXCM’s platform, the liquidity providers do not have to constantly watch their back, worrying about predatory high frequency trading, because the liquidity providers are only allowed to be price makers for our retail clients,” it notes in the study.
The study says that because the liquidity providers do not have to worry about predatory behaviour from FXCM’s retail clients, they can use the retail data to feed into their trading algorithms and can use retail flows to offset orders privately, so they are willing to be more flexible with their pricing for these retail clients.
However, the study is clear in acknowledging that it is comparing its retail platform to institutional and futures markets that serve a different purpose in the FX market.
“FXCM is not implying in any way shape or form that it can use its platform to service HFTs and banks as liquidity providers. The CME, EBS and Reuters are world leaders in the FX industry and provide a critical trading venue for sophisticated institutions. We compared our pricing against these three venues, because they are considered the standard in the FX market,” says FXCM in the study.
Elsewhere it notes: “If the same trading behaviour allowed on institutional venues was allowed on our retail platform, it would negate the trading environment which allows our liquidity providers, who are largely the same participants in the institutional market, to price more competitively.”
According to the methodology released alongside the study, FXCM’s retail clients are defined as individual, joint and corporate accounts trading on its retail price screen.
The study looked at almost 18 million orders, but the comparisons did not include fixed costs, commission or markup.
The methodology also stated that the pricing quality on FXCM orders takes into account slippage and liquidity since the order was actually executed, but does not take into account slippage at the institutional and futures levels since the comparison is being made against a displayed quote.
To compare the spot prices on FXCM’s platforms to the futures prices on CME, the study subtracted the historical basis data from the quoted future price at the time that the order was executed and then compared this against the price at which the order was executed through FXCM.
FXCM says that it used historical basis data from “a top global bank” to convert the relevant futures prices for comparison.
Additionally, because the CME’s standard contract size is smaller than FXCM’s average minimum quote size of 1 million units of the base currency, the study had to “normalise” the futures liquidity in order to make a comparison. This means that when the best quote on the CME was under 1 million units of the base currency, the next best quote was used as the basis for each order comparison.
However, in the study FXCM claims that even if compared to the futures top of book without this unit restriction that FX pricing on its own platform was better 76.79% of the time. This figure goes up to 86.47% if the 1 million unit restriction is applied.
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