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A Major Server Side Metaquotes Build Threatens Third Party Eco-System

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mt4Building a business on top of another platform is always a risky endeavor. While many times these projects are successes as third party programs can focus on smaller niches that larger companies can’t, such smaller firms are vulnerable to network changes. Examples include the closing of APIs, such as what happened to developers who created APPs for Twitter and then saw their products become obsolete as access was cut. In addition, while larger firms may be slow to produce add-on features for their users, they will often copy successful third party applications. Tech blogger Robert Scoble, who was a Microsoft evangelist and employee before entering journalism likes to explain that the business model at the software giant was to copy products being created for the Windows and Office franchises, and if that didn’t work to buy them out.

In the world of retail forex, a similar platform building has been created on top of the Metatrader environment. The MT4 platform was never created to connect with liquidity providers, and works by sourcing pricing feeds into its servers. Meeting demand from brokers requiring real time hedging or seeking to launch a STP model, third party technology providers began to spring up. These firms produced bridging technology to facilitate two way trading of retail client trading with connected liquidity providers. In addition to bridges and order flow risk management tools, providers have also launched products such as mobile and web platforms, social/copy trading networks, and interface plugins around the MT4 environment. During this time, Metaquotes spent time creating the MT5 platform that incorporated some of the advancements being provided by the third party providers.

Recently though, and possibly as a result of the slow uptake to MT5, Metaquotes has become more involved with the production of supporting products for MT4. The earliest example was the launch of a mobile trading app, while also suing and driving third party provider Xogee out of the market. In the past twelve months, Metaquotes has also launched an upgraded iOS app and signal trading. The result is that more and more, Metaquotes is seeing itself compete with its third party providers.

One area though that had remained safe were bridging technologies. While Metaquotes had put technology in place for MT5 to bridge directly with liquidity providers, this function remained absent in MT4. This has now changed as Metaquotes released a new admin build to their platform which facilitates what is called “Gateway Orders”. While not a true bridging technology, the new update provides MT4 to MT4 connectivity.

According to Metaquotes documentation, MT4 admin now allows for ‘quote’ and ‘order’ settings to allow two-way trading with the gateway and provide preference to a STP price over other feeds. From Metaquotes documentation:

Quotes
The quotes received from the gateway:
1. Are not subject to the filtration rules configured for the appropriate symbols. The quotes received from the master server are supposed to be filtered already.
2. Have the highest priority in relation to the quotes of any data feed.
3. FeedTick::feeder has the value of -3.

Orders
The gateway performs operations only with market orders on the master server:
• opening a position
• complete or partial closing of a position
• complete or partial closing of an opposite position.
The gateway automatically confirms:
• setting\modifying\deleting pending orders
• placing\modifying SL and TP.
The gateway automatically rejects:
• closing of multiple positions using opposite ones (Multiple Close By).
It should be mentioned that the gateway does not track any trading operations performed by dealers including opening and closing positions. Thus, such operations should be performed with caution in order not to disrupt the conformity of positions on local and master servers.

Activation of pending orders by SL & TP and Stop-Outs is performed when necessary in the form of the appropriate market orders at the current prices.

Managing compatibility of trading symbol settings
Management can be performed from the moment a trade request arrives to the master server. In the case of incompatibility, the trade request will be rejected with a corresponding entry in the server log.

Routing of trade requests
The rules of processing gateway requests are of higher priority in comparison with automation settings in the client group parameters. It means that even if “automatic only” is set in the client group settings for this group of trading symbols but a trade request corresponds with one of the gateway rules, it will be processed by the gateway.
When checking compliance of a trade request with the gateway rules, the check is performed top down according to the MT Administrator rules.

The first rule that entirely complies with the request parameters is used.

What this does is allow existing MT4 server owners to receive liquidity from other MT4 brokers. For example, rather than using a bridge provider to send STP order flow, a firm will be able to connect to a MT4 broker directly.

Even before the current server side update, the overall trend of Metaquotes was that it was entering the turf of its providers. As this has occurred we have brought up this situation with third party firms. In a January article about TradeSpot’s webtrader product, James Mason, Managing Director at TradeSpot FX responded to how his firm would deal with Metaquotes launching a competing product and how they will aim to add value, answered “We welcome the competition as this fosters innovation among the companies developing products and solutions for traders. In the end, this innovation brings new technology to market that helps brokers and traders realize more profits.“ Similarly, in a conversation last year with another firm where this subject was raised the company explained that their business was based on doing customized work for larger firms while Metaquotes concentrates on more broad technology.

In regards to the current changes, providers and forex insiders who have worked with third party firms that spoke with Forex Magnates offering differing opinions on the impact of the MT4 update. One point that everyone agreed with is that firms whose overall offering consists primarily on their bridge product are expected to have a tough time competing with the MT4 to MT4 solution. In regards to providers with extensive offerings, consensus was mixed, but much of the debate depended on what the overall products were and the firm’s quality of clients. Along with bridging solutions, providers also offer risk management solutions, web and mobile platforms, social/copy trading products, hosting, and interface plug-ins. As such, providers explained that beyond their bridge, they are adding a technology solution that brokers depend on and use to market to clients. Therefore, a broker client that depends on the providers platform eco-system or high-end execution standards wouldn’t be interested in comprising their existing business infrastructure to make a huge connection change.

Countering that opinion, a provider believed that much of the impact will come down to costs. Specifically, true bridge providers whose main revenue stream is calculated based on the volumes executed through their bridge will face tougher competition. To shore up their overall products, these bridge providers also offer hosting solutions, web and mobile platforms, as well as risk management products. However, a broker operating five yards a month through a bridge provider and paying upwards of $20,000 in fees could easily see the cost advantages in switching to MT4 to MT4 liquidity where they will be required to pay just fixed $2,000/month per broker connection. If this were to happen, third party companies that in essence provide their peripheral products for free will need to migrate from a volume based to product based revenue stream.

This view though was contradicted by another provider who believed that if a customer was paying tens of thousands a month to bridge provider, then their customers were trading healthy volume and getting execution standards that they wouldn’t want to change.  The provider did see the potential of a smaller firm being more likely to try alternative solutions.

One of the providers also importantly stated that what Metaquotes added isn’t really a bridge solution but just MT4 to MT4. As such, technology wise, the solution will need to be proven to be as efficient as existing bridging products. He explained that at the end of the day, whether liquidity is brought to a broker’s server from another MT4 or through a third party provider, it still needs to be bridged into MT4. Therefore, it is possible that the higher end providers will benefit as brokers and liquidity providers aiming to market a MT4 price stream ultimately utilize third party solutions to connect their products to MT4.

Also, another concern that was brought was the quality of a MT4 liquidity solution. As Metaquotes isn’t known for providing excellent support and the MT4 to MT4 technology is untested, there is a possibility that any cost savings from bypassing a bridge provider could be counterbalanced by inferior liquidity and executions. In addition, to take advantage of the product, broker users will need to be running their own server and not leasing space from a third party.

Based on these issues, an industry professional who preferred to remain anonymous due to having a working relationship with all the parties that could be effected by the change, explained to us that the overall impact will come down to how the gateway connection matures. At this point, it is in its beta form, but could become much more advanced and could cause volume based providers to see a major contraction of business. He added that within technology, native to native connections are expected to over time perform best. As such, any early technological problems of MT4 to MT4 connection should dissipate.

Broker Point of View

Looking from the other side, an executive who has worked at numerous brokers and has lengthy experience with the MT4 environment pointed out that the initial interest for the product won’t be seen by firms looking to save money, but by brokers that have become liquidity providers overnight. With the new changes, any MT4 broker can now sell a liquidity solution to other firms. As such, while an MT4 broker may not be able to compete on pricing with the majors, they can with the minors and CFD products. For example, brokers striving to operate a full STP model are hard pressed to find adequate counter party pricing for small size lots of futures. While there is plenty of Dow Jones, Nasdaq, and FTSE liquidity, there aren’t that many firms that offer hedging for lot sizes denominated below those of standard mini futures contracts. As such, a dealing desk broker could now easily start marketing liquidity for small size increments. The potential could become greater if a broker is willing to offer counter party liquidity in global equities and less liquid equity index products.

Therefore, while a broker who uses a bridge provider may not see the value of the MT4 update just yet, one can bet that the potential benefits will be marketed to them. Demand is expected to be driven by firms receiving an increase of solicitations from these new ‘broker’ liquidity providers.

In addition to market making brokers, other benefiters could be secondary prime brokers like TopFX and FCStone and ECNs such as FastMatch, TradeStream, or Hotspot’s new wholesale liquidity offering, who can stream their existing liquidity through MT4 via a proprietary built bridge. In addition, brokers providing a multi-asset brokerage solution that covers their CFD and FX STP liquidity needs such as LMAX or Sucden Financial could also see increased demand for their products if they create a MT4 based connection.

Another advantage for brokers will be the ability for larger companies to interconnect their own MT4 servers. For larger firms operating multiple servers, creating a solutions that connects a single pricing and liquidity stream to multiple destinations is critical. With the update, brokers will have an easier time handling the multi-server connection. On this level, third party providers that offer server hosting and leasing would also benefit from this situation as they often own and service multiple MT4 servers.

On the other hand, a provider pointed out that brokers may see a downside of MT4 connection. Due to the ease of connecting MT4 liquidity, a broker may decide to send its toxic order flow to a rival firm. Therefore, how Metaquotes provides monitoring of MT4 to MT4 order flow could ultimately become an important factor for larger firms.

Changes Coming, But Slowly

Overall, technology providers we spoke to explained to us that their businesses are guarded by the advanced products they offer on top of their standard bridging system. This includes risk management systems for automatically dealing with problematic order flow, monitoring solutions of liquidity provider feeds and executions quality, social trading functionality, web and mobile based platforms, and back office integration. While these products add value to a broker’s overall resources, they do cost money.

As such, much of the future of MT4 to MT4 connectivity comes down to costs as well as technology. If the product will work correctly, and brokers can save money, then it is expected to have disruptive effects. Specifically for new firms, that aren’t endangering an existing setup, the MT4 to MT4 solution could become an attractive alternative. However, even were we to see a large uptake of the new connectivity, there remains a market for third party products and low latency hosting solutions, the only question will come down to price. Ultimately though, the landscape for of the existing Metatrader eco-system is expected to be much different in the next few years.


Sucden






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11 Comments on this post

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  1. Michael said:

    Excellent article.

    The key issue really has to be support. When you have a live trading issue you cannot wait a few days for Metaquotes to deal with it. The bridge providers fill a support gap that so far MetaQuotes have failed to provide.

    March 5th, 2013 at 8:58 am
  2. Joe Bond said:

    Great article!

    But aren’t these improvements a little late in the day for MT4?

    I’m not a fan of MeaTrader, but the MT4 – MT4 bridge is what VertexFX platform (Hybrid Solutions) has been offering for years.

    MetaTrader 4 was released back in 2005, this seems like an attempt to keep their cash cow alive, as MetaTrader 5 hasn’t caught on.

    As said in the comment above, MetaQuotes would need to improve their customer service to make this a viable option for most brokers!

    March 5th, 2013 at 12:51 pm
  3. reptile said:

    XTB offer API.. other brokers should have this as good example
    http://xstore-forum.xsocial.eu/

    March 5th, 2013 at 2:34 pm
  4. Stephen Leahy said:

    Well done, Ron. Its an interesting move by Metaquotes; working on significant changes to MT4, rather than focus all energies on MT5. The recent expos and industry events (like the Forex Magnates Summit) are filled with MT4 eco-system companies. MetaQuotes is clearly looking to take over some of those spaces.

    You noted the dual challenges of toxic flow, and liquidity sourcing. Toxic flow is always an issue in the industry; the question is how fast with MQ’s MT4 -> MT4 connection be? If its fast enough, then the LP firms will be able to see and deal with the toxic clients quickly enough. The other issue is liquidity sourcing. Any firm with an MT4 platform could be unknowingly used as a liquidity provider. That can create legal issues in the regulated jurisdictions (you can’t KYC if you don’t even know you are being used as an LP).

    It is a smart move by MQ to expand their MT4 technology footprint to include those products/services that they can easily add. But it does reflect poorly on the acceptance rates of MT5.

    March 5th, 2013 at 3:29 pm
  5. Andy said:

    Can someone explain what exactly constitutes ‘toxic flow’ ? I do assume things like latency arbitrage are not an issue anymore in this day and age. Or at least shouldn’t be, with adequate IT infrastructure and compenent staff. Then what is it?

    March 5th, 2013 at 6:33 pm
  6. Ron Finberg said:

    @Andy – There are several different forms. In regards to latency arbitrage, you are correct that it is less of an issue than just two years ago. However, many firms still aren’t co-locating with their pricing providers so it does occur. Especially among brokers that provide fixed spreads and executions are what is called ‘instant’ and not market orders, market making brokers that aren’t co-locating will run into latency issues.

    Even when latency isn’t an issue mispricing and arbitrage can still occur. Two examples are if a market making broker is creating their pricing based on numerous feeds and one of those feeds goes dead. As long as the old pricing is being included in the broker’s calculations for their spreads, it can lead to mispricing.

    Also, there are occasional error prices that occur. Most brokers use a mid-point of their external feeds to create a price, and then adjust the spreads with the mid-point. So if the EURUSD is trading at 1.3000 * 1.3001, the mid point is 1.30005, if a broker creates a 2 pip spread with that midpoint, clients will see 1.29995 * 1.30015. In the case of a bad price that from a feed provider, the broker could receive a quote of 1.2900* 1.30001. In that case the mid point drops to 1.2950 which would lead to a temporary spread that customers would see of 1.2949*1.2951.

    There are clients that are out with their own algos looking to spot these scenarios. (there are ways to combat these issues, but not every brokers is willing to front the expenses to be proactive and will deal with the problems as they arise – sometimes this means busting trades)

    Other forms of toxic flow are from HFT flow where the algos are sending too many orders and flooding the broker’s servers. Also, HFT is more difficult for market makers to hedge, so they don’t like it in many cases. (incidentally, due to trade compression, prime brokers are seeing cost advantages of having HFT customers, so they have begun to be more aggressive in grabbing that order flow, but that is for another article)

    March 5th, 2013 at 9:09 pm
  7. Andy said:

    Ron: thanks.

    March 6th, 2013 at 5:21 am
  8. Jon said:

    @Ron

    Thanks for the toxic flow explanation. And the article was excellent. I wonder what this means for the future of mt5?

    March 6th, 2013 at 10:15 am
  9. Mike said:

    Interesting article and thank you for reviewing it in the open. I’m afraid I have to echo Michael’s sentiments…

    Metaquotes has not only remained short in the support area for integration especially, but their attitude toward providing solutions to known problems remains distant. Not unlike the cumulative transaction delays which remain in the Mt4 server overall, their answer in Mt5 failed to address this as well, short of forcing brokers and end-users into far greater infrastructure and support costs at the user’s implementation level.

    This routing gateway cannot address any of where execution competency and quality of fill remain as growing industry issues. What good is a gateway that handles multiple fills or partials, when the execution server itself still can’t and doesn’t provide any alternatives in their server API?

    Metaquotes may soon find real competition showing up on the scene with new entrants into the transaction server field offering turn key execution and routing solutions coming already integrated with client apps, MQL equivalent script integration and several key liquidity provisions in the bundles, ready to do business.

    This just seems to reflect that Metaquotes again missed the point, the target and the timing with respect to true integration and scalability on par with current industry trends and needs.

    In the end, the nature of business philosophy continues to show an attitude of trying to steer the industry after the fact, rather than remaining sensitive to providing answers to current industry needs.

    March 6th, 2013 at 10:23 am
  10. Ron Finberg said:

    @Jon – I think the reality is that MT4 is well planted within the industry and will remain so for the next few years regardless of how well MT5 performs. As such, MQ appears to be simply taking more control of their product in the interim.

    March 6th, 2013 at 10:23 am
  11. Andrew Saks McLeod said:

    Also wonder what the next build of MetaTrader 4 will do to external social trading platforms. MetaTrader will have its own built in offering…

    March 6th, 2013 at 2:21 pm

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