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How are trading orders executed in forex?

Have you ever wondered what happens after you place an order in the forex markets? For traders, this might be as simple as placing a buy or a sell order, at market or pending. Typically, when such orders are placed, the forex broker executes them. While this might seem very simple given the way it looks, there is a lot more to forex order execution that simply filling the order.


What happens after you place a trade in forex?

The way trading works is that when you place an order to buy or sell, there needs to be another counterparty that matches your order. Given the vast liquidity in the forex markets, this is often done in a matter of milli seconds, if not faster.

Forex brokers have access to these vast liquidity pools. Also known as liquidity providers, a forex broker then automatically matches your buy or sell order with an opposite sell or buy order.

Many traders might miss this, but forex order execution is an important aspect of trading. Without proper order execution, chances are that your order might not be filled, or your order would be filled but at a bad price.

There are different ways a forex broker can fill your order. Firstly, the dealing desk or the trading desk within the forex brokerage can choose to become your counterparty. In other words, when you place a buy order on a EURUSD, the forex broker will sell to you at the price.

Some call this conflict of interest trading, but this is nothing but market marking. There is another way of forex order execution. Here, when you place a buy order, your order is automatically routed to a network and your trade is matched with the appropriate sell order in the network of liquidity pool.


What is market maker execution in forex?

A market maker, as the name suggests is a broker who makes the market for you. There are both pros and cons with this. For starters, a market maker provides the market for you, even in illiquid times.

This means, regardless of whether there are enough buyers or sellers, the market maker will have to give you a quote to buy or sell. In doing so, the market maker ensures that you are able to trade. A market maker typically takes on the counterparty risk. However, when they take your opposite position, they offset this by offloading the order onto someone else.

Thus, a market maker makes money by adding a spread to their quotes. And by buying from one trader and selling to another, a market maker makes money from the spreads.

For some traders, a market making type of model is not preferred. This is because they believe that such brokers have a conflict of interest with their customers aka traders. But what many do not understand is that a market maker execution is quite reliable especially if you are trading illiquid forex markets.


What is a non-dealing desk or STP execution in forex?

A preferred way for forex traders of course is to trade with a forex broker that has an STP execution. In this case, when your trade is placed, your order is routed to the forex broker’s liquidity pool.

Through complex computer programs, your orders are matched to the opposite orders from the network. Here, the forex broker does not make the market for you. While on one side such brokers do not have a conflict of interest, there is a risk that your orders might not be filled at the price you expected.

Furthermore, given the STP or non-dealing desk execution, the ask and bid prices can vary quite a bit. Thus, you might end up paying a bit more on the spread. In return for the service offered by the non-dealing desk forex broker, they charge a commission on the trading volumes that you trade.

Many forex traders believe that trading with a non-dealing desk broker is the best. But this is not entirely true. There are many financial instruments that are not as liquid as forex. Thus it is possible that a market maker is required. But given the fact that the forex markets are quite liquid, it is better to trade with a non-dealing desk or STP executing broker.

Whether you choose a market maker or a non-dealing desk or STP forex broker, you cannot avoid the fees. In one scenario, it is called a spread while in the other scenario, it is called commissions.

As a trader, you need to assess how much you will trade and thus make an estimate on whether it is cheaper for you trade with a STP or non-dealing desk forex broker or to trade with a market making forex broker.

Read 410 times Last modified on Sunday, 26 April 2020 16:13
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