The development of information technology makes the interbank forex market more accessible to ordinary traders. By “interbank forex market” we mean a large automatic system for processing orders from banks, brokers, and other financial institutions to buy and sell currencies. The main advantages of the interbank forex market are efficiency, high liquidity, and favourable prices on transactions.
Trades on the interbank market are performed using ECNs (electronic communication networks), which bring together a great number of market participants. ECNs are well known to traders who invest in the stock market, but they have only caught on among forex traders relatively recently. An ECN is a platform or network in which liquidity providers (for example, large financial institutions) and individual traders execute transactions between themselves, without any intermediaries. Importantly, ECNs eliminate any conflicts of interest on the part of the broker or trader when orders are executed. An ECN broker’s income consists of commissions the client pays on transactions. ECN brokers are not involved in price setting. Current prices are determined by market participants’ orders.
Since August 2012, Exness has offered its clients access to the interbank market through an ECN built on a software ‘aggregator’ that connects quotes from liquidity providers and coordinates the execution of client orders. Trade orders from all of the network’s members go into a single database of orders. Opposing orders are executed when their basic parameters (asset, volume, and price) coincide. Thus, the main premise of any ECN is that the system automatically selects matching orders and executes them.
Let’s take a moment to look more closely at trades in the Exness ECN. For the interbank market, orders to buy or sell any particular financial asset are typically executed at current market prices. Following this rule, Exness developers have optimised order execution. In the familiar MetaTrader terminal, each client can see a trading instrument’s price chart, as well as its combined order book of buy/sell orders, also known as Level II quotes. The Level II quotes, presented as a table, contain information about limit orders (placed by ECN participants) for specific trading instruments; namely order volumes and prices. The table displays only the five best prices for buying and selling the trading instrument. In other words, it always shows a trader the five lowest ‘ask’ prices and the five highest ‘bid’ prices for the desired instrument, along with the corresponding order volumes. Consequently, a trader may use technical analysis techniques in their work and quickly analyse the market situation while evaluating the relationship of the buy/sell volumes displayed.
Let’s consider the mechanics of executing market orders on an ECN. When opening a position to buy or sell, a trader activates a market order. The order is analysed by the system and the best prices currently available to the client are selected as follows: of all the orders in the system, the offsetting position is selected that has the closest (best) price for an appropriate volume of the selected instrument. If a position with an appropriate volume and price is found in the order book, then both transactions (the trader’s and the corresponding position’s owner’s) are executed at the price that is most advantageous to both parties. Again, the ECN broker does not take any part in determining the price. This system provides quick selection of the best variant at the price corresponding to the offsetting position. When the volume of the selected order is insufficient to execute the trader’s order at the best price, the shortfall is taken from the order books of other positions. When this happens, the trader’s order is executed at the average price.
Expanding the flow of liquidity considerably improves trading conditions across the board
Thanks to modern technology, the entire procedure described above takes just a few moments. Considering that all orders are market orders, the trader will never get a re-quote in response to a placed order. The process is fully automated; human intervention is barred at every stage. It doesn’t matter to Exness how a trader trades, though this may not be completely true. An ECN broker profits if its clients trade successfully, because it is directly interested in increasing the total volume of their trades.
Unfortunately, it’s not possible to cover all of the nuances of order execution within a single publication – there are simply too many. However, some things are worth calling out. First of all, this applies to organising the execution of pending orders in the Exness ECN.
The issue is that when orders are pending on the terminal, it’s not possible to determine in advance whether there are enough funds for the margin when the order is executed. It is possible for there to be insufficient funds to cover the margin, but the pending order is sent to the ECN for execution anyway. When this happens, as soon as the current price for the trading instrument reaches the price specified in the order, the order execution procedure begins. The broker bears virtually all of the costs associated with executing such an order. Accordingly, in order to try to avoid potential losses, many companies do not transfer pending orders to the interbank market system in advance. Instead, they execute them like regular market orders; i.e. when the trading instrument’s current quote reaches the level of the pending order. In these cases, the order’s execution price is unknown. The probability increases that the order will be executed at a price considerably worse than that stated in the order.
But Exness specialists have designed and implemented a unique technology for working with pending orders. After a pending order has been created in the terminal, the existing verification system continuously monitors the gap between the current market price and the price specified in the order. The trading account’s level of the free margin is monitored at the same time. If the price of the pending order approaches the current market price and there are enough available funds to execute the pending order, then the order is sent to an ECN participant for execution; i.e. it is sent to the interbank market. Next, the participant who the order was sent to for execution decides how the order is displayed in the order book (if we’re talking about a pending limit order, of course): either the order is added to an already existing order, or it may be presented as a separate position. When a pending order is transferred to the interbank market, the trader’s available funds and the distance to the current price continue to be monitored.
In the event that the current market price of the trading instrument substantially strays from the price stated on the pending order, or the trading account’s available funds are insufficient to cover its margin, the order is cancelled at the liquidity provider and only remains in the terminal. Then monitoring of the available funds in the trader’s account and the order price relative to the financial instrument’s current price resumes. When the market price reaches the price level of the pending order, the order execution procedure begins (if there are enough available funds). This technology for transferring pending orders to the interbank market is unique: orders are always verified to see whether the bank that is entrusted is the optimal choice, given the gap between the order price and the market price.
One more useful feature of ECN trading should be mentioned – the ability to place limit orders inside a spread. Remember, the Level II quotes always show the trader the best five prices for buying and selling a trading instrument. However, the best ask price and the best bid price in no way restrict a trader’s abilities. He or she is free to place limit orders with prices between the current best ask and bid prices. Let us briefly summarise our description of the Exness ECN by listing the main features that are most beneficial to traders.
- Tight spreads on the most popular instruments – multibank liquidity from leading providers allows for the best prices.
- The ability to deposit and withdraw funds from a trading account using several electronic payment systems – efficient and convenient operations involving debiting or crediting funds from a trading account are now available in interbank market trading.
- A small commission ($25) for trading volumes of $1m – as always, Exness strives to reduce its clients’ costs.
- Trading within a spread – by placing limit orders within a spread, traders can influence the best bid- and ask-prices.
With respect to the Exness ECN’s future prospects, we should mention that new liquidity providers are expected. This is very significant, because the expanding the flow of liquidity considerably improves trading conditions across the board; e.g. the prices of the main financial instruments and the quality of the execution of client orders. Additionally, ECN accounts will soon be accessible on the MT5 trading platform.
In conclusion, we would like to note that the development of the interbank forex market depends almost entirely on how quickly modern ECNs improve. Therefore, in designing our own ECN, Exness specialists have tried to make use of the latest technological advances and to consider all of our clients’ desires, while maintaining the best traditions of high quality service.
Exness won Best Mini Broker, Best Trade Executions, and Best Order Management, in the 2013 Foreign Exchange Awards.