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. They 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 ideally fills the needs of financial institutions and their clients. That is thanks to its high throughput and low latency.
What are 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. This results in incoming opposite orders reducing current exposure on a hedge account. In simple words, buy orders close sell orders and sell orders close buy ones. The question arises. With which open order should the new opposite be netted with? That’s why we use First In, First Out rule, closing the oldest open position on an account.
Pros and cons of netting accounts
The main advantage of netting accounts is cost optimization. We can achieve it by reducing swap charges and margin usage. It means that the broker does not 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, a full STP broker needs 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. At the same time, retail traders closed profits. How is that possible? As mentioned earlier, orders are netted chronologically. New orders from one trader can close the order of the trader holding a loss for a long time. So where is the difference then? The answer lies in open profit. When reconciling our hedging result, we have to consider closed profits and the difference in open profits between particular days (Delta of Open P/L).
FIFO confuses not only startup brokers. 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. This way, we show profitability on every single trade routed to Match-Prime. Our solution helped many of our clients, but for some brokers, it was still too confusing. That’s why we started working on an alternative.
“Retail mode” – non-FIFO account
Many retail traders are the most familiar with MT4 and MT5 platforms. There, it is possible to hold simultaneously buy and sell orders. For a long time, liquidity providers also have offered such an option, distributing their liquidity from MetaQuotes’ platforms through MT4/MT5 Gateways. Thanks to the rapid development of bridge solutions, brokers started migrating to LPs with FIX APIs, resulting in netting accounts. As mentioned earlier, we decided to develop a solution allowing brokers to STP orders through FIX, but in “retail mode”. We did it in cooperation with our strategic partner, Match-Trade Technologies. Required changes included multiple bridge adjustments. For example, 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, Brokers gain simplicity and clarity in booking brokerage profits. No more time-consuming reports and reconciliations. Our solution matches every client’s trade with an order on a hedge account. Thus, we know exactly how much we earn on a single trade. Margin usage is solved the same way as in netting mode, the margin is blocked from the larger leg.
Alright, what is the catch? Currently, the main problem from the technical point 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. 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. That means that we cannot connect the most popular platform, MT4, 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 the Dealing Dept. of each broker. Considering the described arguments, the convenience of “Retail Mode” stands out. At Match-Prime, we believe it is the new standard in CFD liquidity providing.