In recent years, the Forex trading industry increasingly began to use the concept of ECN (Electronic Communication Network). ECN networks are different from the major exchange trading systems through which participants trade with each other only electronically. ECNs have been used for a long time and are well known by traders investing in stocks, but for Forex traders this is a new concept because the global exchange market is unregulated. Their entry in currency trading, through the creation of specific software products, is a successful way to transfer best practices from the regulated markets to the Forex market. This move will achieve greater transparency, better trading conditions and avoid conflicts of interest.
With the trading module L2 (Level 2) in Delta Trading, Deltastock became the first institution in the world that offers its clients a real ECN. With it clients can see and choose with which liquidity providers to trade with and subsequently track with whom their order is executed. Using this module enables order execution either: client-to-client, without the interference of a dealer, or through STP (Straight Through Processing) directly to the interbank market with Deltastock’s partners. It must be kept in mind that Deltastock remains a counterparty to clients’ trades, regardless that it acts as intermediary, since the orders are routed to the liquidity provider or on behalf of a client.
Meanwhile in order to achieve full transparency in the execution of trades, the L2 Module allows you to see the names of specific Liquidity Providers (providers of liquidity) quoted in the ECN, to choose which one to trade with or to submit orders via SMART routing (routing the order to the first best possible price for the full depth of the market).
The L2 Module allows Deltastock and the liquidity providers to compete with each other from the flow of quotes, and Deltastock’s clients to benefit from the narrow spreads as a result of this competition.
Also one of the biggest advantages of the L2 module is that it allows you to open a position with one broker, bank or market-maker and just as easily close it with another, without having to: open separate accounts, lose money on the spread, pay for bank transfers, meet by different margin requirements or pay swaps on hedge positions.
In the examples below it is shown how to place orders in ECN (L2 of Delta Trading), client-to-client, without the intervention of a dealer, and how to choose specific liquidity providers with which to trade through STP (Straight Through Processing).
Client-to-client order execution
To better understand the trade mechanism it is necessary to open two different accounts. This will help us understand how a submitted limit order is seen by all other participants and thus influences the price and overall liquidity of the particular currency pair in the ECN.
Let’s open two different accounts and choose a currency pair. Let’s choose USD/SEK, which we will use to make trades and place orders with.
Client 1 (in our example, account 1) wants to buy 100 lots of the currency pair USD/SEK, and at the same time wants to negotiate a better price than what is currently on the market. For this purpose decided to submit a limit order and buy 100 K USD/SEK at the price of 6.8082. At the moment when the order is confirmed in the system it appears in the panel with orders, and immediately becames visible to all, including to client 2 (in the example account 2), as shown in figure 1.
Figure 1
At the same time Client 2 wants to place an order for 50 lots USD/SEK, but because he also wants to achieve a better execution price, submits an a limit order and buy 50 K USD/SEK at the price of 6.8087 8 (figure 2).
Figure 2
In this way, both are trying to negotiate a better execution price for the order, while influencing the liquidity and spread in the ECN, which is only 5.9 pips compared to the fixed spread of 150 pips! Note that orders are represented by the name Delta (Deltastock), since both accounts are of Deltastock clients and the counterparty of the orders is Deltastock.
In a similar situation, Client 1 has placed a limit order "Buy" 110 K USD/SEK at a price 6.8210. At the same time Client 2 sees the order and decides to place a 60 K USD/SEK market order (figure 3).
Figure 3
As a result of this, both execute an order with each other, with Deltastock being the intermediary, for 60 K USD/SEK at the price of 6.8210 0, which instantly is seen in the order panel in figure 4.
Figure 4
The benefit for both is significant because if both buy and sell at the same time at the fixed spread, they will enter the market at a price of 6.8281 5 for Client 1 and 6.8131 5 for Client 2, instead of 6.82100. They will pay much more (the spread), rather than if they pay the relevant commission for the execution trough Deltastock's Level 2.
Submitting a market order from the SMART Counterparty system, choosing a Liquidity Provider and executing orders with that provider through the STP (Straight Through Processing).
Trough the L2 module it is also possible to submit market orders that can be executed through the STP. In order for this to happen, the field "Market" order should be selected. The "Limit" becomes inactive. Next to the "Market" order appears a window with a drop-down menu, in which by default is selected "SMART" (fig. 5).
Figure 5
In the "SMART" system, you can keep track of all available orders in the L2 module - yours, the other clients’ using the ECN, and also all the orders quoted by the Liquidity Providers in the module.
The execution of market orders in the "SMART" system means that your order will be routed to the first Liquidity Provider, which is currently quoting the best buy / sell price.
The advantage of the "SMART" system is that your order will be immediately traced to the best price currently available in the ECN.
In case the market order is executed partially at the best buy / sell price, the rest of it is transferred to be executed at the next best bid currently available.
In the example below, a market order of 1 500 000 "Buy" EUR / USD is submitted and it will be executed in two parts. 585 000 will be bought at the best currently available price meeting the limite order of the Liquidity Provider Deltastock – "Sell" 585 000 at 1.5074 9 EUR / USD (figure 16), and the remaining 915 000 will be executed at a price of 1.5075 EUR / USD – an order from the Liquidity Provider Interactive Brokers. In the window “L2 Orders” the executed market order will appear with a weighted average price of execution, formed by the above two opposite orders.
Figure 6
When the order is executed the L2 order window will change colors to green. A confirmation will appear in the bottom right corner of the window (Fig. 7).
Figure 7
Important: There may be cases where the volume of the order is too small for the Liquidity Provider quoting the best price buy / sell at the moment. Then the order or the remaining part of it will be directed to the next Liquidity Provider, which allows the execution of orders with the desired volumes.
When submitting market orders though the Level 2 module, depending on the market liquidity at any moment, the market orders can be executed at a price that differs significantly from the quoted price at fixed spreads.
In addition to submitting orders in the SMART mode, you can choose a specific Liquidity Provider trough which to execute your trades. One of the main advantages of this method of trading is that at any time a broker or a bank may quote better prices than the other participants in the ECN. Setting your order to be executed specifically by that provider eliminates the risk for it to be partly executed, and the rest of it to be insufficient to conclude a deal at a good price. At your request, it is also possible to open a position trough a specific Liquidity Provider and close it trough another.
To place an order with a specific Liquidity Provider, you have to select the field “Market” and from the drop-down menu select the code of the Liquidity Provider you prefer.
Figure 8
If Interactive Brokers (IB) is selected form the counterparty drop-down menu, you will be able to see only orders from this liquidity provider. Also if you place any market orders they will be executed directly to liquidity provider on behalf of Deltastock.
Figure 9
In case you select Deltastock (Delta) as the liquidity provider, you will see all of the company’s placed orders in Level 2, all orders placed by Deltastock’s clients, and your own placed orders marked in bold.
Figure 10
In the example below it is shown how to open a position with one liquidity provider and close the same order with a different liquidity provider.
In the Level 2 EUR/USD window we choose Interactive Brokers (IB) as the liquidity provider. Then we buy 50 K EUR/USD as it is shown on figure 11.
Figure 11
Then we choose a different liquidity provider, for example Deltastock (Delta) and we sell 50 K EUR/USD. This way we have closed the previously opened EUR/USD position (fig. 12).
Figure 12
When placing a market order with specific liquidity provider you should know that the minimum order size is different for each liquidity provider. Detailed information for the minimum order size can be found on Deltastock’s website.
Please note that Deltastock is the liquidity provider with the lowest minimum order size.
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Risk Disclosure
Advantages of ECN trading
Level 2 Manual