The Primary Advantage to Non-Dealing Desk Trading

This morning I published a post to the NDD forum this morning and I think it bears repeating so I’m republishing it on the blog this afternoon. I hope visitors find it useful and informative.

Non-Dealing Desk Trading: The Primary Advantage

After reading a number of posts to the forum and a recent article in the Wall Street Journal (WSJ) I’m having to step back to re-examine the advantages / disadvantages of non-dealing desk trading. The result is that I'm coming to the conclusion that as it stands today the greatest benefit to trading through a NND broker may lie in the fact that the trader's positions are not known to the counterparties the trader is trading against. The article appearing in the WSJ, points to the importance of truly anonymous trading.

The headline of the article reads "CBOT (Chicago Board of Trade) Gets Flak Over Online Trades". The subheadline reads "Critics Fault Exchange for Falling Short in Effort to Fully Shield User Data". The exerpts to follow provide a glimpse at a problem spot traders face when they trade with dealing desk brokers who, seeing all of their positions, are free to actively trade against them.

"Big brokerages can still see key information about who is on the other side of supposedly anonymous electronic traes by looking at data the Chicago Board of Trade prints on each transcation, according to exchange docuemnts and interviews with market participants.

"The lack of anonymity has persisted despite rules passed this summer by CBOT, the country's major makret for futures contracts linked to Treasury bonds, grains, and other assets."

"CBOT critics say that clearing information is enough for firms using powerful computers and mathematical forumlas known as algorithjms to figure out the individual counterparty information that the CBOT does obscure - and potentially use that information to their advantage.

"The exchange's approach also differs from that of the neighboring Chicao Mercantile Exchange, which eliminated all information about individual traders and their clearing firms from its system about six weeks ago."

Reading this article, emphasizing the need for trading anonymity, I can't help but think that forex spot traders are inevitably going to get the short end of the stick when trading against brokers who not only create but control their respective markets. Their positions are known to the broker counterparty and, therefore, traders can be easily targeted for take out.

Perhaps we could get those who purport to offer a non-dealing desk trading platform to discuss this issue in greater detail. Specifically, they might explain how ECN/STP orders are processed. What do participating counterparties really know about the trader's positions?

I would have posted a hyperlink to the WSJ article but, unfortunately, one has to be a subscriber to access it.

Recommended Additional Reading

Think You've Been Trading the Forex? Think Again

Advantages and Disadvantages of Non-Dealing Desk Trading

Did you like this post? Spread the word.

Social Bookmarking

An Action Plan to Put an End to Broker Stop Hunting

Visit any Forex forum and you’ll see a thread or two about stop hunting (stop fishing) but little or nothing ever gets done about it. Why? First, most traders wouldn’t recognize a stop hunt if they saw one. More importantly, when individual traders do recognize they’ve been stopped out they do little or nothing to call the broker to account for its actions beyond making a demand for personal restitution. Should it be any wonder, then, that the practice of stop hunting continues unabated.

As I pointed out in a recent post to the blog, while the National Futures Association (NFA), the self-regulating arm of the retail forex industry, talks a good game, it has never taken a broker to task for failing to meet the organization’s stated guidelines regarding unfair trade practices which include a specific reference to stop fishing. If nothing else, this is certainly an indication that the chartered self-regulatory agency doesn’t take its responsibilities seriously at least when it comes to protecting traders from unscrupulous dealers.

The question, of course, is what can be done. Well, it’s really quite simple. Traders need to know that there’s a way to call not only the broker to task, but to force the NFA to do its job and that’s by getting involved. I know making reference to the following quote is trite but it’s all too poignant: “For evil to prevail, all that need happen is for good people to do nothing.”

So exactly what can you do to put an end to the practice? If you’re a trader who thinks he’s been burned, do the following:

1. Take screen shots whenever you see a pricing anomaly.

2. Post an accounting of your experience to The NDD Forum, and ask for answers. If nothing else, this will put brokers on notice that they're being watched.

3. Drop an email off to the broker with a hyperlink to the forum thread you think ripped you off and ask for an explanation.

4. Forward your observations and complaints to both the CFTC and NFA and ask them to look into the incident. Going one step further, I don’t think it would be unreasonable to demand that a) the broker account for the pricing aberration, b) account for the number of traders affected, c) make restitution to all those affected, d) pay a fine, and e) acknowledge that they did, indeed, spike rates, and f) agree to not do it again. (Sounds a little like the kind of discipline one might exact on a three-year-old doesn’t it?)

If you weren’t personally affected by the broker’s actions, all you have to do is take a few seconds to bring the post to the attention of the CFTC and NFA. Drop them an email, complete their online complaint forms, and demand answers and regulatory action.

An idealist, I don’t realistically expect either the NFA or CFTC to levy all of the aforementioned requirements, but I should think that this course of action will force brokers and regulatory agencies to deal with this issue on a global basis which, I would hope, will put an end to stop fishing once and for all. Maybe all brokers don’t steal money from their clients in this manner but those who do need to be called on the proverbial carpet.

Now you might be asking yourself how this course of action differs from the action traders when they think they’ve gotten the shaft. It’s simple. If every member of The NDD Forum dropped the CFTC and NFA an “I am concerned” email or completed their online complaint forms, regulatory agencies would have a difficult time ignoring the issue.

One trader, incidentally, has already stepped up to the plate. It’s up to you to help him (and, thereby, help every yourself and every other trader). Let's put an end to this practice once and for all. If you want to see the trader's original post at the top of the thread, under "Display Modes" click on "Hybrid".

Recommended Additional Reading

Think You've Been Trading the Forex? Think Again

Advantages and Disadvantages of Non-Dealing Desk Trading

Did you like this post? Spread the word.

Social Bookmarking