Nowadays, FIX Protocol is the primary communication protocol for institutional trading in the forex and CFD industry. Major liquidity providers distribute liquidity through FIX API. They either use proprietary systems or external distribution systems like OneZero or PrimeXM, which allow them to handle hundreds of active FIX sessions with numerous ticks, trades and other information coming back and forth. Together with advanced systems, FIX Protocol, with its high throughput and low latency, ideally fills the needs of financial institutions and their clients.
What is netting mode and FIFO?
Routing trades through FIX resulted in netting mode based on the FIFO rule as an industry-standard on hedge accounts. Netting mode on trading accounts does not allow to keep open buy and sell positions at the same time, which results in incoming opposite orders reducing current exposure on a hedge account. In simple words, buy orders close sell orders and sell order close buy ones. The question is, with which open order should the new opposite be netted with? That’s why we use First In, First Out rule, which would result in closing the oldest open position on an account.
Pros and cons of netting accounts
The main advantage of netted accounts is cost optimization by reducing swap charges and margin usage. It means that the broker doesn’t have to pay swaps on bigger exposures on both sides while charging traders overnight fees on every single open order. Additionally, one direction exposure limits the amount of margin used to hedge clients positions. Based on our experience full STP broker needs only around 60-70% of total deposits to be available on a hedge account.
The biggest disadvantage of the netting mode is difficulty in reconciling the A-Book profits. Due to the FIFO rule, our closed profit on the hedge account on a particular day can be negative, while retail traders closed profits. How is that possible? As mentioned before, orders are netted chronologically, and new orders from one trader can close the order of the trader, who was holding loss for a long time. So where is the difference then? The answer is in open profit, so always when we reconcile our hedging result, we have to consider closed profits and the difference of open profits between particular days (Delta of Open P/L). FIFO confuses not only startup brokers, but we saw experienced brokers who had problems with calculating profitability on book flow. As Match-Prime, we decided to create manuals and special A-Book profitability reports, showing profitability on every single trade routed to Match-Prime. Our solution helped many of our clients, however for some brokers, it was still too confusing; that’s why we started working on an alternative solution to netted accounts.
“Retail mode” – non-FIFO account
Many retail traders are used to MT4 and MT5, where it is possible to hold simultaneously buy and sell orders. For a long time, liquidity providers also offered such an option, distributing their liquidity from MetaQuotes’ platforms through MT4/MT5 Gateways. Thanks to the rapid development of bridge solutions for MT4 and MT5, brokers started migrating to LPs with FIX APIs, resulting in netting accounts. As mentioned before, with the help of Match-Trade Technologies, we decided to develop a solution allowing brokers to STP orders through FIX, but in “retail mode”. Required changes included multiple bridge adjustments like passing correct order IDs to be able to recognize correct order during closing and Match-Trader Pro’ engine to support opening opposite trades on hedge accounts.
What do you get and lose using “Retail mode”?
First of all, simplicity and clarity of booking your brokerage profits. No more advanced reports and reconciliations, which takes time. Every client’s trade is matched with an order on a hedge account, so you can know exactly how much you earned on a single trade. What is more, margin usage is solved the same way as in netting mode, where the margin is blocked from the larger leg.
Alright, what’s the catch? Currently, the main problem from the technical part is swaps as they would be charged on both sides. However, in Match-Prime, we understand that brokers profitability is crucial here; that’s why we are working on a solution that will guarantee not paying more swaps than in netting mode by default. Unfortunately, “retail mode” is not for everyone. Due to integration limitations, it is available for brokers using MetaTrader 5, Match-Trader and other FIX compliant platforms, which means that the most popular platform, MT4, cannot be connected to a non-FIFO account.
To FIFO or not to FIFO?
The decision of the type of the account type should be based on the needs and preferences of a Dealing Dept. of each broker. Considering the described arguments, we believe that the convenience of “Retail Mode” will work for its popularity and become a new standard in CFD liquidity providing.