ECN vs Retail

Reader Craig raised an interesting point in a comment which I looked into, yielded some interesting info which I was unclear on:

Craig said... "You should start looking into ECN brokers and the things that go along with them (Order books etc), for me it was like Alice falling down the rabbit hole, it opened up a whole new world."

The first two posts on this thread at Forex Factory answer the point clearly:

http://www.forexfactory.com/showthread.php?t=5043 (You may need to be a member to read it). Short version is that retail brokers take the other side of your trades, where as ECN connects you direct to the interbank (the market) but you need to be trading large volume (100K lots).

For me, a decent retail broker is fine at the moment - I am not yet using 100K lots so all I really need is a decent retail broker who doesn't rip me off (bucket shop). But the point is taken that once you are trading that kind of size, ECN should be seriously considered so that you are trading direct into the market.

It makes sense - retail brokers basically rely on the vast majority of traders to wash out. I was reading the 'about us' page for InterbankFX and this quote stood out (emphasis added):

"In addition, industry estimates place Interbank FX as retaining its customers an average of nine months, versus the industry average retention of only 45-60 days. "

45-60 days is the industry average??! Holy cow batman!

If the retail broker is taking the other side of the trade, then of course the contents of your account went in their pocket, and not out into the market (if you washed out I mean). If you are kicking their ass and your volume is increasing then this obviously directly threatens their business (if they are undercaptalized, which some of the small ones are). One trader I talked to actually went into to a certain brokers office to find out what was going on, and discovered he was on a 'watch list'. I.e. when he entered a trade, someone at the other end was watching him and "doing something" that was clearly unfair (stop hunting probably). This same trader mentioned above, as a counter measure, used to watch several feeds at once in order to actually trade against their price manipulations if he saw the broker stop hunting - quite often his broker would refuse to enter the trade if they were stop hunting, so he would dive on the phone and say "give me the price you are quoting RIGHT NOW!" They negotiated an arrangement after this; but still, this is right out of Jesse Livermore.

A good broker that is heavily banked won't do this, especially if they can switch customers over to ECN if their volume is big enough. The basic rule of thumb here is pick one of the top 5 biggest retail brokers in the world and you shouldn't have a problem, and avoid smaller ones.

Retail is fine for learning, but ECN should be looked at once your volume is large enough.