Inside Forex – MT4 and Interbank Liquidity

A bit of background

10 years ago independent traders could not trade Interbank Liquidity. Just as ALCOA doesn’t sell aluminum by the gram, Goldman Sachs doesn’t make markets in micro-lots!

But then, some smart Russian engineers realised: sure, GS won’t do it, but how about we:

  1. Observe the price at which GS and say, UBS, trade EURUSD bi-laterally
  2. Let people bet on price differences for 0.01 lots of EURUSD?

And that’s how MT4 dealers introduced people to independent trading.

MT4 dealers

Except, people didn’t really trade the InterBank Market.

When MT4 dealers chose to quote at the price at which GS & Co exchanged currency, dealer liquidity almost felt like the real thing.

Then again, when they quoted different prices to different customers (ever heard of stop hunting?) it all got a bit… claustrophobic!

Dealing on MT4

An artificial replica of the real thing

That’s when independent traders learnt not to trade against the referee and demanded “out of the dealer bowl, into the DMA ocean!”.

Thus popular demand “upgraded” the popular MT4 platform for Direct Market Access.

MT4 Bridge / Brokers

MT4 Plug-ins “bridged” the disconnect by directly connecting traders and Goldman Sachs and created MT4 brokers like Darwinex.

Pony Express

Your broker’s incentive is to get you there, faster

(Note, a broker and a dealer are very different things, and most forex “brokers” are actually dealers or broker-dealers! “Real” brokers route your trades to a broker’s broker (a Prime Broker or PB). With brokers you trade against your broker, he trades against his (Prime) broker and the broker’s dealing conflict of interest is neutralised.)

An MT4 DMA broker routes trades via 3 software components:

  • MT4 Trading Terminal
  • MT4 Server
  • The MT4 bridge that directly links MT4 with our PB (who trades on our and your behalf directly against banks)

The price feed you watch on (e.g. Darwinex) MT4 is the result of:

  1. The PB feeding available volume at each price point to the Bridge, in FIX format
  2. The Bridge “translating” FIX market-depth (different volumes at different price levels) into a single “Top of Book” MT4 bid-ask
  3. MT4 Server streaming the Top of the Order Book (Top of Book) price to your MT4 Terminal, via the Internet

When you hit “trade” on MT4 terminal, your trade request flows:

  1. From MT4 Terminal to MT4 Server, and this triggers
  2. A FIX trade request from the MT4 bridge to the PB

Once the order is matched in the order-book, the Prime Broker issues a FIX trade confirmation to the MT4 Bridge, which feeds it into MT4 Server, that then creates an accounting entry into the original MT4 “Dealing” Ledger, even though this is no longer a dealer’s bet, but a DMA trade.

A bridge can only do so much

This 3-way inter-play begs some interesting questions: e.g. what happens, when you enter a limit order in MT4 Terminal – e.g. to Stop your Loss?

  1. MT4 Terminal sends this limit order to MT4 Server
  2. Your Stop Loss is stored on MT4 server
  3. (It’s only sent from MT4 server to the Bridge when “triggered”)

When is the “trigger”, triggered?
The moment the bid fed by the Bridge into MT4 Server falls below the Stop Loss level, as waiting on MT4 Server.

More importantly, how does it trigger?
MT4 Server responds, to the bridge with a market (NOT limit) trade-request.

The market trade-request is filled at the then available prize, at a level potentially slipped from the Stop originally placed on MT4 Server.


Ouch – wasn’t aiming this far!

Bucket-shop slippage?

NO! If you don’t trust our take, check how Investopedia differentiates two contexts for slippage.

There’s dealer slippage: the cat streams a price to the bowl. When it’s off market levels, alert scalping fish jump at opportunity… dealers re-quote, and slippage takes profit opportunity!

With Darwinex (or other true DMA brokers), you suffer what futures/equity traders call slippage. The price changed by the time you got to the order-book, because you were “late”.

And you were late because bridge software can NOT place MT4 limit orders (Stop Loss, Take Profit) into DMA order books. This is precisely why DMA liquidity-takers stay away from Non Farm Payroll: SL and TP are slipped when liquidity is thin. In extremely volatile environments,

  1. MT4 stop losses could trigger market orders getting so slipped, they’re filled higher than a hypothetical Take Profit. (In this cases, you’d be happy confused).
  2. MT4 Take Profits could get you filled below the Stop-Loss, and then… well you see where this is going.

Take aways?

The above are theoretically possible extremes. Not because DMA brokers are bucket-shops, but because waves break when reaching shallow water.


Obviously, this is not an excuse to cover-up a gap in our MT4 offering. For our part, we’re lobbying our Bridge Provider to power functionality that places MT4 Limit orders as limit orders inside the DMA order-Book. And we’re also developing a little surprise, but more on that coming soon 🙂

Meanwhile, please keep your feedback coming: it means the world to us!


Inside Forex – Darwinex DMA explained

As a trader, you can choose to place your bets with:

  1. A broker – who trades with you, against an independent 3rd party (“the market”). This is what Darwinex does and always will do. In brokerage jargon, brokers operate an A-Book
  2. A dealer – who trades against you and thus plays the role of “the market”
  3. A broker-dealer, who can act in either of the above capacities

In technical jargon, dealers and broker-dealers incur risk by running a so called a B-Book. You can watch our take on economics & incentives for either of the models in this webinar.

More interesting to you is the answer to “What does Darwinex DMA mean, and what happens to my trade after I hit trade on Darwinex MT4” – so let’s go for it!

MT4 B-Book

Out of the box, MT4 is a dealing platform: it is exclusively designed for a dealer to make markets against customers, by publishing a bid-ask price, on which customers may decide to trade.

If you e.g. go long 1 lot the EURUSD, MT4 processes:

  1. Your buy at the ask
  2. If the dealer accepts the opposite side of your trade, an accounting entry into the dealer’s B-Book at the bid is processed

Your trade’s P&L is a function of the evolution of (the dealer’s!) price-feed.

Technically though, it’s a simple bean-counting affair involving only MT4:

  1. You routed a trade request via the Internet in MT4 proprietary encoding
  2. MT4 received it
  3. The broker chose to fill you (or did not, in which you’d get a re-quote)
  4. You received a notification on your MT4 terminal

MT4 Direct Market Access

Things become slightly more involved in a pure A-Book broker – see chart below.


In a nutshell:

  1. You routed a trade request via the Internet in MT4 proprietary encoding
  2. MT4 received it (no change so far)
  3. A software “bridge” triggered a FIX message to a 3rd party – we use this external provider for this
  4. The 3rd party determined the market price is, at arms’ length from Darwinex within 4 ms or less, as described in the diagram.

Crucially, and differently from most other brokers out there, Darwinex currently matches all your orders with LMAX in London, a MiFID regulated Multi-Lateral-Facility (MTF) to ensure that:

  1. All customers trade on one and the same price feed, resulting from an order-matching process that works on public and FCA enforced rules
  2. Customer identity remains anonymous – so winners are co-mingled with the rest of our flow and not discriminated against
  3. Liquidity providers enjoy no “last-look” on any orders fed into the order-book. This means you will NEVER experience a re-quote
  4. Counterparty risk is kept to a minimum – by virtue of only Tier 1 liquidity providers feeding prices in, and risk among liquidity takers being evenly spread

These are the reasons why we strongly believe in trading with customers, on Exchange. If the CHF affair and the FX rate rigging affair trigger anything, we bet it’s regulators accelerating the move of spot foreign exchange trading away from OTC, onto Exchanges.

MT4 & DMA – limitations

Alas, whilst on Exchange is the fair way, this is not to say that LMAX is without practical limitations owing to:

  • Adverse selection
  • MT4 Integration with the order book
  • (At times, and on certain pairs) Market depth

We’re more committed to providing customers with competitive liquidity in all market environments, than we are to fostering on Exchange clearing…. and we’ll provide more background on all the above in due course – for the time please note that we’re evaluating all possible options to mitigate the above limitations as widely and promptly as possible.