Metatrader 4 - Tick Volume in FX does not Equal Liquidity

Offline Jack

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Something that's been bothering me a lot lately that relates to MetaTrader 4, and most forex focused platforms for that matter: The confusion around volume as displayed in the platform thanks to MetaQuotes (and other's) misrepresentation of the indicator.

In essence, MetaTrader 4 doesn't report real volume in dollars transacted terms. What MetaTrader (and most other fx platform) does is measure the "tick" volume. This difference matters.

I believe this came to be thanks to combining the following two points:

1) Spot forex is traded in a fragmented and decentralized way. There is no central point of exchange, nor a central point of regulation or reporting, and there's so many different product structures (non-standardized contracts between venues, NDFs, swaps, etc) in spot which transact over so many different types of venues (dark pools, lit pools, ECNs, Banks, MMs, etc..) that there is simply no way to know the true dollar amount in transacted volume worldwide on any given currency pair. Atop of that, it would be unreliable to try and 'guess' the volume based on only looking at one transaction venue or geographical location (...signaling risk alone will cause some firms will execute their larger positions across multiple venues, in different market centers, between different banks, at different times of the day.)

2) Retail traders, and traders in general, coming over to spot forex from the stock, futures, or options markets expect some measure of volume as these markets generally operate on centralized exchanges that can accurately report such info. Many strategies are even based on volume for price confirmation. So the 'client demand' is huge for a measure of volume and the absence of such an indicator on a given trading platform might be perceived as a problem when selling forex as an instrument to trade.

Understanding this demand, MetaQuotes has had "Tick Volume" in MetaTrader for ages now to be used as a substitute for actual volume.

"Tick Volume" is a measure of how often the price 'ticks' up or down. Literally the frequency of ticks within a given time period. The explanation MetaQuotes gives, and their justification of using "Tick Volume", is that price doesn't generally move unless transactions take place, and the more moves the more transactions must be happening.

That would be great on it's own, but MetaQuotes takes one additional step further that can create a bit of confusion: They just call it "Volume", and are not upfront about how it's measured.

Sure there's a few details about tick volume if you use the help menu within MT4 or dig around online, but to new users (or people who just haven't been interested enough to dig deeper) it's just "volume.." This suggests a measure of actual dollars transacted (which as we've already established, is impossible to currently measure in spot.)

This terminology difference isn't the end of the world, unless of course some big name in the forex industry comes out and compounds the problem further by expanding on this terminology difference instead of correcting it...

In early 2013, MyFXBook came out with a "liquidity" tool that measures the difference of 'tick' volumes between brokers--of course just calling it "volume" and downplaying any mention of "ticks"--and insinuates that the higher tick volume means greater 'liquidity'.

I kid you not, from their official announcement of the tool (also visible from the link I'll provide further down):

Quote
Why would one want to do that you may ask? The answer is that higher volume means higher liquidity which translates to lower (or better) spreads.

So not only are they furthering the misrepresentation of volume found in MetaTrader, but they are adding to the confusion by making a connection between tick volume and possible liquidity of a broker. There is no connection here.. a broker's liquidity available is entirely, 100%, independent of the tick volume they display.

Put another way, if I was a broker and I wanted to increase the standing of my brokerage to the top of the volume charts at MyFXBook--to stand out from the rest of my competition obviously--I'd just refresh my quotes twice as much as anyone else despite not having the liquidity available to back it up. But that doesn't matter, since MyFXBook has told everyone that tick volume equates to liquidity, so I'll still look golden. (The same way a few junk brokers have cut their spreads down artificially to be the best on spread comparison sites, despite making up for it with higher commissions or indirectly though slippage.)

So like a good citizen of the net, and concerned user, I called MyFXBook out on this:

http://blog.myfxbook.com/2013/01/14/forex-volume/comment-page-1/#comment-3462

(Just in case they get wise and delete the comment, I screen capped it here: http://i.imgur.com/QnJ8w93.jpg)

They responded that they fully were aware of the difference, but did it anyway since 'MetaQuotes' felt it was acceptable. Great, compound a mistake and say it's ok because others started it... didn't you hear the old "if everyone jumped off a bridge, would you do it too?"

They restricted me from commenting further on their blog after this exchange.  -- That didn't stop two brokers and multiple traders from contacting me and thanking me for standing up and speaking out about it.

Since writing on MyFXBook's blog, over the past few months I've read multiple posts on forums by people around the net who are now comparing volume with MyFXBook's tool (or directly within their trading terminals) between brokers and making financial decisions (trades, choices of currency pairs to trade thinking they are liquid, and opening accounts) all based on this misplaced trust of volume perpetuated by well respected businesses like MyFXBook and MetaQuotes.

Please, don't get me wrong, I <3 MyFXBook and think their trade analytics software is absolutely awesome...but they are very wrong on this matter and I'm not afraid to say it.

So say it with me: Tick Volume != Liquidity. And don't be afraid to point this out next time you hear someone suggest it does.
« Last Edit: July 26, 2013, 08:43:16 pm by Jack »
So youve been cleaning the carts, but what about the cart slot in the system?