Retail Hedge – General information #

Retail Hedge – this concept means that each client’s transaction it is mapped by exactly the same transaction on the hedge account. In this case same number of transactions will always be opened on a hedge account as is open on client accounts. Even when clients have opposing orders open they will be shown on the hedge account 1:1 as on the client’s account.

Important information:

Never close any trades on your hedge account manually, because then your clients will not be able to close their positions!

Retail Hedge rules at FX-Edge #

Through the example it will be easier to understand this rule. The Retail example is best illustrated in practice using a MT5 account connected with a hedge account on FX-Edge.

We assume coverage 100%, which means that if the client opens buy 1 lot of EURUSD in MT5, on hedge it appears with the same volume.

Example 1

A BUY trade of 1 lot on EURUSD was opened:

The same position is opened on FX-Edge hedge account:

Example 2

A trade in the opposite direction was made, a 1 lot of EURUSD on SELL side:

As mentioned at the beginning of the manual, in the case of opening opposite orders, the same order will be opened on the hedge account.

Example 3

In the next example, we made three trades from a MT5 account – all in the same instrument (EURUSD) and side – BUY. First 1 lot at 15:13, second 0.5 lot at 15:14 and the last 0.3 at 15:16. The value of open positions is over 59 USD loss at the price 1.16167:

At FX-Edge account we could observe the same situation:

Next, we decided to close in a MT5 account only one, the middle one – 0.5 lot of EURUSD with the loss 15.50 USD (seen in screen 5). So after this action in MT5 account we see two trades (screen 7): 1 lot with loss of 40 USD and 0.3 lot with loss of over 6 USD at the price of 1.16165 :

At the FX-Edge account we could observe that exactly the same trade has been closed.

Short clarification regarding profits on b-book clients #

When the client is located in a b-book group it basically means that the risk of clients being profitable is fully on the Broker’s side. It means that all profits/loss of the clients have to be covered by the Broker. In that case Broker could use commissions, swaps and spread markups to decrease the profitability of the clients trades. Commission and spread markup is charged for the client while opening a trade and are not stored anywhere on a separate account  – they simply create greater initial loss in a new trade for a client.

How to calculate profit on hedge account with open positions #

IMPORTANT – Proper profit  calculation in a hedge account is possible if the Broker did not move clients with  open positions between a-book and b-book, because these trades will distort final profit.

IMPORTANT – The result can be also incorrect if broker moved the clients between a-book and b-book even without open positions. If broker requested closed trades monthly report from a-book groups at a given time (for example in the end of the month) the report can not include all a-book accounts and trades from this period of time as it will only comprise accounts/trades which are a-book at the moment of report generation.

Profit analysing in a hedge account is fully transparent when calculation is made for the whole history of the hedge account.

Formula for calculating profit:

Hedge Account     –     MT4/MT5 A-book client’s accounts     =     Broker Profit

(net open profit + closed profit from hedge account) – (net open profit + swaps + commissions on open position + closed profit from MT5 a-book)

As it is mentioned above, the components of the result of the hedge account consist of net profit from open position and profit from closed trades. For MT4/MT5 a-book accounts there are net profit at open trades, swaps and commissions from open position and profit from closed trades. With such assumptions, subtracting the result of Broker’s retail a-book clients from the result of the hedge account gives an outcome of Broker profit.

For example:

opened positions (hedge account and MT5)

closed positions on Hedge Account

closed positions on MT5 a-book

Calculation:
          Hedge           –           MT5         =     Profit

(-93.31-15.08) – (-106.10-39.03) = 36.74 USD
(opened positions + closed trade from hedge account) – (opened positions + swaps on opened position + closed trades from MT5 a-book)

If Broker wants to calculate profit for a particular month, he needs to know the exact value of net profit of open and closed trades for the period before the month which will be calculated – only then such calculation will give a proper result. If Broker does not have  such information, he can make calculations of profit from beginning of trading in hedge account (assuming that it’s just an a-book Broker or if having also b-book clients only if they have not been moving to a-book groups before) using calculation method from example mentioned above.

Where is located Broker’s profit from Hedge Account #

If Broker properly sets markups and/or commissions on a-book clients’ groups, conditions of trading on the hedge account will be significantly better (investors on MT5 will have worse prices/commission for trading). What is more, swap points on hedge are smaller than on MT5.  If all above conditions are met then the broker will always receive better results on the hedge account than his clients on their trading accounts.

Example:

Broker has added markup in MT5 at 10 points.

As it stands on screenshot, due to better conditions of trading on hedge accounts, loss on hedge is smaller than loss on MT5. It applies to every trade, as long as markups/commissions are set properly (value per 1 lot is bigger than the value of commission on a hedge account).

According to this rule, Broker’s profit is a difference in balance/equity between the hedge account and his all a-book accounts in MT4/MT5. So if value is in plus towards the hedge account compared to a-book Broker’s clients then we can assume that Broker earns based on his settings (markup/commission). Broker’s profit from a-book trades is not charged in another specific account or added in another way to account – it is a difference in valuation of loss or profit between these two systems. For checking the situation whether Broker is earning, “Pentaho Reports” (mentioned in this manual) are the best tool for profit measure.

Pentaho reports – checking Broker’s profit on the hedge account #

In order to access page where the Broker can see “Closed Trades Profitability Report” from the hedge account and have a look on his profits on a-book, Broker should login into his Bridge Manager, press “Reports” tab, where there is visible a button “go to reports page”, which should redirect to https://reports.match-trade.com/pentaho/Login. Credentials to the pentaho reports page are the same as for Bridge Manager. In order to check the profit of the Broker, tab “Closed Trades Profitability Report” should be chosen. After choosing the dates from which Broker would like to check the profits, a hedge report is generated. Columns are explained one by one in the sequence as they go.

Column explanation

·         MT4 Login – Login number of a trading account in MT4/MT5

·         MT4 Order – Number of the trade order

·         MT4 Group – Group where the trading account is located

·         Exec Time – Time at which the trade was executed

·         Symbol – Symbol traded

·         MT4 Side – Type of an order, sell or buy

·         LP Price – Price at which trade was executed

·         Native Exec Vol. – Volume of a trade that was executed

·         Total Markup – Markup given in points

·         Markup USD – Markup given in USD

·         MT4 Commission USD – Commission that was paid by the client in the MT4/MT5

·         LP Commission USD – Commission that was paid by the Broker to the liquidity provider

·         Broker Profit – Summarized profit of the Broker of a single trade

The last column “Broker Profit” is crucial for Broker because it is showing what is the total profitability of trade which is hedged. If value is in minus, it means that Broker is paying more fees than he is receiving profits per trade from his clients. To change this value he should increase markups in his clients group or add commission. To better calculate the exact value which should be added in markups/commission “Markup Calculator” can be helpful for managing values. Support is adding such a calculator in “Starting Pack” but if something is missed please contact them via Skype or Mail.

Using and analysing Pentaho Reports is the best and easiest way to monitor and calculate profit from Broker. If Broker will move clients between his b-book and a-book groups, calculations can be incomplete if Broker would want to compare total value from hedge account with his a-book clients.

Besides “Closed Trades Profitability Report”, it is worth mentioning three other report tabs. First one is “Single Trades Profitability Report”, which calculates profits from trade open and close separately. It may be confusing as some of the trades have been opened, but haven’t been closed yet, so it is better to stick with “Closed Trades Profitability Report” as it is more transparent. Another report worth mentioning is “Detailed Hedging Report”. Using this one, besides checking profits, Broker is able to examine technical data as slippage and execution time. Last report, named “A-book simulation report”, is used for comparison of actual Broker’s profit/loss from clients trading on b-book and possible gains from those clients if they traded on a-book. This tool can be useful in spotting profitable clients and reducing potential risks.

Broker Profit discrepancies when moving clients with open positions #

It can be a situation, when the client is moved from b-book to a-book with open trades but trades on the hedge account will notbe open at the same entry price as the prices on client trades. Entry price on the hedge account will always be a market price at the time when the client is moved to the a-book, because the hedge account will automatically adjust positions when the auto-hedge option is enabled. If Broker adjusts positions manually also the price will be the current market price. Due to that, the total profit of clients open positions and total profit of hedge positions will be different because some trades are opened at different price levels. This will also affect pentaho reports – the outcome of a client that was moved from b-book to a-book will not be included in the reports. If trades on the hedge account are open at the time when the client is moved to a-book group at current market price (not at the price which is present on his clients positions), it will cause that closed trades between hedge account and a-book clients will be different.

Moreover, this situation also will affect the MT4/MT5 Closed Trades report. When Broker will generate Closed Trades report for a given month for a-book groups and in that month he had moved clients between b-book amd  a-book groups, then the report will not fully reflect real results. This a-book report will include trades which previously were in b-book and which had not been hedged. So these actions (moving accounts between groups) can cause discrepancies in reports between hedge account and a-book clients.

How to control discrepancies between clients positions and hedge account – Hedge Monitor tab in Bridge Manager #

In order to find out if everything is properly hedged, Broker can use the Hedge Monitor which is available in the Bridge Manager. In the tab “Hedge Monitor” Broker is able to check what  volume is open on the side of his clients and what volume is open on the hedge account.

As it was described in previous chapters, sometimes it can happen that volumes don’t match between these two systems (Hedge Account and A-Book clients’ accounts). The reason for that can be a situation when Brokers are moving clients from a-book to b-book group with current open trades or vice versa. Second case can be a situation when Brokers manually open trades in a hedge account which don’t  affect the changing volume from the client’s side. There can also be other reasons (stop outs on hedge acc, etc), which can cause these discrepancies, so it is very important to monitor this tab on a daily basis.

Hedge monitor will show exactly the time when discrepancy happened, the difference between volumes and after expanding the “broker name”, Broker is able to see on which instruments exactly the discrepancy happened. If the reason for such a discrepancy is known for Broker and he wants to adjust it because of his actions he can press the button “adjust” which will be visible when the difference in such an instrument will be shown. After pressing it, all the discrepancies will be corrected by executing adequate trades on hedge account.

If such a discrepancy is visible in a hedge monitor and the broker doesn’t know exactly why it happened, Broker should contact Support to make an investigation.

In order to control discrepancies, Broker could do the daily check of the hedge monitor. If there is any discrepancy the broker can adjust the position by clicking the Adjust button in the hedge monitor tab.

If Broker is making many moves of his clients between groups and he would like to avoid adjusting positions each time manually, it will be better to use option Auto Hedge – this will save time of manual work and financial loss due to unopened positions in hedge account. After enabling this option, every 25 minutes all the discrepancies that occurred between those time intervals are automatically adjusted.