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Oanda Implements Dynamic Pricing – Feedback Mixed

by Ron Finberg
    Oanda Implements Dynamic Pricing – Feedback Mixed
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    In December 2012, Oanda implemented a change to their spreads by applying dynamic pricing. Their CEO K Duker made reference to it during his Reddit AMA appearance last month. The theory behind dynamic pricing is that spreads are conditioned to be more in line with interbank spreads. This contrasts to static pricing which is generally based on producing a fixed spread based on a mid-point market price.

    There are various forms of dynamic pricing. The simplest is that which is used by STP brokers which provide a markup on their pricing. For example, if their banks provide them a best bid or ask spread of 0.5 Pips at 1.30505 X 1.30510, they could add a 1 Pip markup of 0.5 Pip on each part of the quote to create a 1.5 Pip spread of 1.30500 X 1.30515. As the brokers spreads that they receive from the banks changes, the spreads seen by their clients will evolve as well.

    For brokers that are also market makers, dynamic spreads are generally derived by offering clients a bid and ask that is based on market depth quotes. For example, interbank pricing may show a 0.2 Pip inside spread. But those prices may only have a maximum trade size of 5 lots. However, for the inside spread of the best quotes of 100 lots, the spread could rise to 0.8 Pips. Knowing that the ‘top of book’ spreads have less available Liquidity , a market making broker will often base their prices on the best bid and ask price available for 100 lots. This avails the broker the ability to easily hedge their order flow if the need arises.

    In regards to what is best for clients, both dynamic and static have their pros and cons. Dynamic spreads are expected to produce tighter overall pricing, but wider spreads around volatile times and during the dead trading period between 22:00 to 23:00 GMT. Specifically between 22:00 to 22:10 GMT, spreads will be wild as many banks temporarily adjust their pricing for the new trading day (the FX trading day closes at 22:00 GMT/17:00 EST). With static pricing, spreads will typically be fixed with smaller adjustments made during times of volatility. For traders unaccustomed to this behavior, dynamic pricing can be tricky as customers used to seeing a EURUSD spread around 1.0 Pip for the entire day may find it odd to suddenly see a 7 Pip spread at 22:05 GMT when no news is occurring.

    In Oanda’s case, the broker has received mixed feedback from clients, with several Forex Magnates readers telling us that spreads have appeared inconsistent and there are concerns of stop hunting and excess slippage. (Public thanks to readers for bringing the issue to our attention) We posed the inquiries to Oanda to gain their comment. Specifically, we wanted to know whether the user complaints are part of a permanent change that Oanda has implemented, or are the result of temporary glitches due to the rollout of the new pricing.

    Courtney Gibson, Vice President of Trading at Oanda responded with an explanation that details how their dynamic spreads are calculated. Gibson stated:

    Courtney Gibson, Vice President of Trading, OANDA Corp

    Courtney Gibson, Vice President of Trading, OANDA Corp

    “We rolled out dynamic spreads late last year as part of our ongoing efforts to optimize the OANDA Trading Platform . Essentially we've improved OANDA’s hedging algorithm to make our pricing in line with interbank standards. The new algorithm tracks market volatility in real time and widens spreads in tune with market movements, which is especially crucial around news events. In the past this was done manually. OANDA’s average spreads have decreased significantly on a time-weighted basis since we introduced the new algorithm. While spreads widen to reflect market liquidity during news events, they do so for a shorter period of time. Our analysis shows that OANDA spreads continue to be among the most competitive in the industry. This is corroborated by broker comparisons on third-party websites like MT4i, which factors in commission fees when calculating broker spreads (not all third-party comparison sites include commissions). Many of our competitors charge commissions that result in a significant markup on the cost of trading from the “base” spreads that they advertise. In contrast, OANDA does not add commissions or hidden fees, and our spreads are published in real time for complete pricing transparency. At the end of the day, pricing is just one element of why clients choose a specific broker. In addition to competitive spreads, OANDA brings a host of other benefits to the table – excellent customer support, quality execution with no requotes, immediate settlement, world-class technology – these add to our appeal among retail traders.”

    Based on the above answer, Oanda is backing up the premise that the dynamic pricing has led to lower overall spreads, even though prices have become more inconsistent. While Gibson’s answer is what you would expect Oanda to say, it is interesting that he mentioned that adjustments were previously being made manually. This would in fact lead to prices remaining static for greater periods of time.

    If you are using Oanda, we’d love to hear your opinions of the pricing in our comments and whether it has made executions better or worse overall.

    In December 2012, Oanda implemented a change to their spreads by applying dynamic pricing. Their CEO K Duker made reference to it during his Reddit AMA appearance last month. The theory behind dynamic pricing is that spreads are conditioned to be more in line with interbank spreads. This contrasts to static pricing which is generally based on producing a fixed spread based on a mid-point market price.

    There are various forms of dynamic pricing. The simplest is that which is used by STP brokers which provide a markup on their pricing. For example, if their banks provide them a best bid or ask spread of 0.5 Pips at 1.30505 X 1.30510, they could add a 1 Pip markup of 0.5 Pip on each part of the quote to create a 1.5 Pip spread of 1.30500 X 1.30515. As the brokers spreads that they receive from the banks changes, the spreads seen by their clients will evolve as well.

    For brokers that are also market makers, dynamic spreads are generally derived by offering clients a bid and ask that is based on market depth quotes. For example, interbank pricing may show a 0.2 Pip inside spread. But those prices may only have a maximum trade size of 5 lots. However, for the inside spread of the best quotes of 100 lots, the spread could rise to 0.8 Pips. Knowing that the ‘top of book’ spreads have less available Liquidity , a market making broker will often base their prices on the best bid and ask price available for 100 lots. This avails the broker the ability to easily hedge their order flow if the need arises.

    In regards to what is best for clients, both dynamic and static have their pros and cons. Dynamic spreads are expected to produce tighter overall pricing, but wider spreads around volatile times and during the dead trading period between 22:00 to 23:00 GMT. Specifically between 22:00 to 22:10 GMT, spreads will be wild as many banks temporarily adjust their pricing for the new trading day (the FX trading day closes at 22:00 GMT/17:00 EST). With static pricing, spreads will typically be fixed with smaller adjustments made during times of volatility. For traders unaccustomed to this behavior, dynamic pricing can be tricky as customers used to seeing a EURUSD spread around 1.0 Pip for the entire day may find it odd to suddenly see a 7 Pip spread at 22:05 GMT when no news is occurring.

    In Oanda’s case, the broker has received mixed feedback from clients, with several Forex Magnates readers telling us that spreads have appeared inconsistent and there are concerns of stop hunting and excess slippage. (Public thanks to readers for bringing the issue to our attention) We posed the inquiries to Oanda to gain their comment. Specifically, we wanted to know whether the user complaints are part of a permanent change that Oanda has implemented, or are the result of temporary glitches due to the rollout of the new pricing.

    Courtney Gibson, Vice President of Trading at Oanda responded with an explanation that details how their dynamic spreads are calculated. Gibson stated:

    Courtney Gibson, Vice President of Trading, OANDA Corp

    Courtney Gibson, Vice President of Trading, OANDA Corp

    “We rolled out dynamic spreads late last year as part of our ongoing efforts to optimize the OANDA Trading Platform . Essentially we've improved OANDA’s hedging algorithm to make our pricing in line with interbank standards. The new algorithm tracks market volatility in real time and widens spreads in tune with market movements, which is especially crucial around news events. In the past this was done manually. OANDA’s average spreads have decreased significantly on a time-weighted basis since we introduced the new algorithm. While spreads widen to reflect market liquidity during news events, they do so for a shorter period of time. Our analysis shows that OANDA spreads continue to be among the most competitive in the industry. This is corroborated by broker comparisons on third-party websites like MT4i, which factors in commission fees when calculating broker spreads (not all third-party comparison sites include commissions). Many of our competitors charge commissions that result in a significant markup on the cost of trading from the “base” spreads that they advertise. In contrast, OANDA does not add commissions or hidden fees, and our spreads are published in real time for complete pricing transparency. At the end of the day, pricing is just one element of why clients choose a specific broker. In addition to competitive spreads, OANDA brings a host of other benefits to the table – excellent customer support, quality execution with no requotes, immediate settlement, world-class technology – these add to our appeal among retail traders.”

    Based on the above answer, Oanda is backing up the premise that the dynamic pricing has led to lower overall spreads, even though prices have become more inconsistent. While Gibson’s answer is what you would expect Oanda to say, it is interesting that he mentioned that adjustments were previously being made manually. This would in fact lead to prices remaining static for greater periods of time.

    If you are using Oanda, we’d love to hear your opinions of the pricing in our comments and whether it has made executions better or worse overall.

    Topics
    stp
    brokers
    oanda
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