- Exploiting Order Flow for the Discretionary Quant - Part 1
- Exploiting Order Flow for the Discretionary Quant - Part 2
- Simple Mechanical Trend Following in the Forex Market
- Is a Reward to Risk Ratio Inherently Better Than Another?
- Robots Aren’t What They’re Cracked Up To Be
- Creating a Trading System Using Neural Networks
- Function Based Trailing Stop Mechanisms
- The Seven Deadly Sins of Automated Trading
- Exploiting the Volume Profile
- Building Robust FX Trading Systems
- Know Your Currencies
- Automating FX Trading Strategies
- Grammatical evolution
- Identifying an Edge
- Interview with Salvatore Sivieri
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Expert Advisors and the Reorganization of Retail Forex
Broker role in Forex
The role of the broker is changing. Traditionally, ‘brokers’ provided access to the markets. It wasn’t possible to access markets without going through a broker, unless you were a large institution.
Forex didn’t have the exchange/ broker model and by not having any structure or history, they used the stock/commodity broker/exchange model to approach the business. Large banks typically didn’t want to engage in retail business.
Since Forex is not traded on an exchange, and until recently completely unregulated, brokers didn’t have any guidelines or structure to model their business. So they operated how they felt fit – some taking from their experiences in other markets, and others just inventing the model as they went along.
Investors are seeking alternatives. Those with small amounts to invest, search the internet in hopes of finding something else than their mutual fund heavy 401k that is slowly losing.
Some will find Expert Advisor systems that have websites marketing their EAs. While Forex is now regulated, any individual in any country can develop an EA and sell it, professionally or not, the internet is not yet regulated. So there are thousands of websites promoting some system they are selling, for which they receive the sale price.
The concept that investors are seeking information to do their own trading is compelling, that investors are becoming like DIY homebuilders who would choose to do their own investing rather than just outsourcing it to a large company. However, this presents a large conflict and potential problem, as many of these investors may not have the required education and training in information analysis to make a qualified decision on their portfolio. To complicate matters, sellers of these EA robots have an interest to say anything to convince you to buy the product.
Regulators have focused on the regulation of brokers and have not considered how to address this. Since many of these EA developers live in offshore jurisdictions, it’s questionable how they might approach regulation of this part of the market. Some suggestions might include a ‘regulated’ network of developers who choose to participate in a set of standards, similar to how the NFA regulates managed accounts (CTAs). But concepts like this have not been discussed in any comment letters.
Unique problems with current model
The customers who purchase these EAs obviously want to trade them and make money using the best possible (optimal) environment. They then begin the search for the ‘broker that will run my EA’. The problem with this is that:
• Brokers do not have the code to the EA they are trading so if a trade doesn’t go right, they do not have perfect information.
• Coders of EAs do not have information about how the broker is setup, and Meta Trader 4 server has thousands of settings that can impact performance of the EA
• Other factors such as computer hardware, network connections, and other variables come into play that can impact performance.
A situation has formed that EA traders and developers are mostly blaming brokers, and brokers are mostly blaming EA traders and developers for problems, with little critical information exchanged between them.
Trading automated robots (EAs) has multiple variables involved:
• Logic of EA
• Code of EA
• Broker settings
• Broker liquidity
• Broker policy
• Hardware environment of trader/broker
• Software environment of trader/broker
• Network environment of trader/broker
• Human element
Any technical support of an EA must include all of the variables.
According to publicly available financials, the R&D budget of FXCM is zeroi. Other brokers are not likely much different.
Brokers typically purchase existing solutions by vendors for most of their business operations; they have high payments of salaries, and little or no technical development. There may be exceptions but because of the large demand of retail Forex, the trend is to invest in marketing & sales.
There is a need for standardization in the global industry. FIX is a good example of a set of standards developed by a collective of banks, brokerages, and traders alike, in the FIX communityii. Many brokerages are well run but operate on a completely different system than another. Brokers have spent millions each developing their own proprietary systems, instead of the FIX community solution. Over complicating matters, 3rd party software vendors sell brokers individual components of their systems, such as a client back office, or an MT4 bridge. Since brokers may not have a structural ‘global’ system design, many of these components do not integrate well and can even cause large problems. One solution may be a set of FIX style standards for the retail Forex industry. With the recent passage of Dodd-Frank, at least the NFA provides standards for regulation, however it does not include technical standards; they only require ‘compliance’ to the rules which can take many forms. It’s laudable to give brokers freedom to run their businesses as they choose, but it also creates unnecessary problems.
Whoever takes the lead in a standardizations effort in the growing retail Forex industry stands to seize the greatest control over an exponentially increasing market.
Elite E Services