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Quality Of Trade Execution

quality of execution introTraders often do not understand that placing a trade on the trading platform provided by their broker is different from trade execution. So what is trade execution? This is simply when the placed order from the trading terminal is filled.

Due to the growth of online Forex trading and pressure from various regulatory authorities; most brokers and financial trading firms have improved their quality of trade execution. Regulatory authorities require Forex brokers by law to offer their clients the best quality of trade execution. Since high quality of trade execution leads to low transaction costs; this move has led to brokerages saving their clients millions of dollars which would have been as a result of poor execution.

Due to these regulatory obligations and the incentive to grow their client base; most popular online Forex brokerages publish their execution statistics. Below are examples of such statistics from FXTM broker;

FXTM SLIPPAGE

 

FXTM SPEED

 

FXTMREQUOTES

 

Such statistics are mainly from Transaction Cost Analysis (TCA) and its subset Quality Execution Analysis (QEA). This has been made possible by the availability of analytical tools to assess the quality of trade execution as well as growth of providers and consultants in the field. One authority involved in verification of brokers quality of trade execution is the Financial Commission (FinaCom PLC) through a post trade analysis solution referred to as VerifyMyTrade.

verifymytrade

Source; VerifyMyTrade

 

Brokers who have passed the verification process are then able to settle disputes and complaints arising from quality of trade execution internally. Brokers issued the certification for quality execution by the Financial Commission in the past include; Alpari, Forexclub, Amarkets and Juno markets (source; Finance magnates).

Brokers have several options to execute their traders’ orders once it is placed on their online trading platform.The execution methods available include;

Electronic Communication Network (ECN);

An ECN matches buy and sell orders using computer systems to link traders and other smaller participants to large liquidity providers through an ECN broker. Due to its electronic nature and fast execution, ECN brokers provide tighter spreads relative to other brokers.

Below is an example of ECN execution;

If one trader wants to buy 50 000 USD at 1 USD each and another trader wants to sell 50 000 USD at 1 USD, these orders are electronically matched by the system leading to fast execution.

Order to Market Maker;

This execution is in house where the broker sets both the buy and sell prices of the orders received, making profit from the difference (spread). The broker does not match buy and sell orders and takes the risk to its own order book hence becoming the counter party to your trades.

Another execution methods mainly used for stocks is Order to Floor;

Brokers offering stocks traded in stock exchanges such as the NYSE (New York Stock Exchange) can have their orders filled by people on the exchange floor. Since a human floor trader is involved in executing the orders, Order to Floor execution path is slow. Exchanges have requirements for membership for a broker to direct orders to their floor, hence; brokers who are not members may use a third party to direct their trades. This type of trade execution is referred to as Order to Third Market Maker.

Due to various incentives, brokers will choose their own path for order execution. However, as the pressure for high quality of trade execution mounts; most tend to shift to faster paths such as the Electronic Communication Networks (ECN).

Conclusion;

Trading in Forex and other financial instruments involves the high risk of losing part or whole of your trading capital. However, the reduction of transaction costs such as slippage due to high quality of trade execution increases the traders’ chance to profit and enables them to compete with other large players.

Read 756 times Last modified on Sunday, 26 May 2019 15:35

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