Dealing Desk Broker Shoots Itself in the Foot

[Longfellow]

Article from 2003, discovered on PFG web site in 2006, regarding Commission Free Trading..

So why are they offering commission free trading today? Whatever the answer is to that question, the 2003 article does support the argument against "commission free" trading. In case the article suddenly disappears from the web, it is posted here as follows:

"No-Commission" Costs Traders Real Dollars

CHICAGO, April 2, 2003: "A penny saved is a penny earned." This quaint children's motto may be true, but in the real world of dollars and pips it seems a bit antiquated. "You get what you pay for" is more suitable.

The Real Cost of Trading The most expensive cost of currency trading is not the commission but rather the bid/ask spread and slippage. Unlike stock trading, where the 2 to 3 point bid/ask spread is $2-3 for 100 shares, currency trading is a leveraged investment in which 2 to 3 points (pips) is $20-30. On "commission free" or "no commission" currency trading, the bid/ask spread is widened by at least 1 pip on BOTH sides of the spread to guarantee the broker is paid. Therefore the "commission free" or "no commission" currency trading spread is 4 to 5 pips wide.

For example, the "no commission" spread on Eurocurrency versus the US dollar (EUR/USD) is 4-5 pips wide (during normal market conditions.) On a 100,000 Eurocurrency trade, the value per pip is $10. If the broker is getting the extra pip, the cost to the trader is $10 per side, or $20 a round turn. A round turn includes the buy and sell of a currency. If a commission was charged, the bid/ask spread passed to the trader could be tightened to 2-3 pips wide, or $20-$30 between the bid and offer. Even at discount commission rate of $20 a round turn, which would be on par with the "no commission" companies, the benefit of tighter spreads is more desirable. There is a more insidious cost; the cost of slippage or missing a trade due to wide spreads.

Better Fills / Better Prices: Under a no-commission format seldom, if ever, will you get the best possible fill. In the world of pips, a little slippage can add up to real dollars to traders. Some companies that offer discount online Forex trading have changed their commission structure to offer traders cheaper execution costs. As a way to offer better execution and cheaper transaction costs, companies like Peregrine Financial Group Inc. (PFG) are offering discounted online commission rates as an alternative to wider spreads. PFG's Chief Operating Officer Russ Wasendorf, Jr. stated, "The Forex currency trading has become commoditized. The spreads have tightened due to online trading to the point where the retail trader is able to get the same tight market as the institutions."

The PFG difference versus the "no commission" option is outlined below.

Filling Limit Orders: No commission vs. PFG, Assume a trader places a buy limit order at 1.2303 for 100,000 EUR/USD and the EUR/USD market goes to bid/ask of 1.2301/1.2303 (EUR/USD is trading a 2 pip market). A trader at PFG would be filled. Assume the same trader with a "no-commission" broker attempting to place a buy limit order at 1.2303 for 100,000 EUR/USD and the EUR/USD goes to a bid/ask of 1.2301/1.2303. The trader sees a widened price which is a bid/ask of 1.2300/1.2304. The trader with the "no commission" broker does not get filled. Trading on the PFG's platform, the trader paid an established fee per transaction and got the trade he or she wanted. With no-commission, the trade was lost -no charge - but a trader must be in a market to create an opportunity to make money.

Filling Stop Orders: No commission vs. PFG. Assume a trader places a sell stop at 111.90 in US dollar versus the Japanese Yen (USD/JPY), and the market goes down to a bid/ask of 111. 91/93. The trader won't be stopped out at PFG. Assume the same trader with a "no-commission" broker using a stop order at 111.90 in the USD/JPY and the USD/JPY goes to a bid/ask of 111.91/93. The trader sees a widened price which triggers the stop. The 111.90 USD/JPY stop is triggered by a bid/ask of 111.90/111.94 widened price spread. The trader gets stopped out when the market may not have only gone close to the price. No commission, but the advantage of staying in the market is lost. What is that worth?

Traders can trade currencies COMMISSION-FREE. The question is: CAN YOU AFFORD IT?

Moderator: Just a note. I visited PFG's website and couldn't find anything that would indicate that they're offering comission free trading. Can you point us to the page on their site that indicates that they've reversed their position in this matter?