What is the Order Execution Quality of the Forex Broker?

What is the order execution quality of your broker？

The process of filling a trader's desired buy or sell order is known as order execution.

We discussed whether the prices that forex brokers display on their trading platforms are fair and accurate in the last class.

However, having fair and accurate pricing on your trading platform is useless if your trades rarely execute at the price displayed.

It's like going to a bakery and seeing a picture of a cake they sell.

You like the way it appears and decide to order it. However, when you receive it, you will realize that the baker was unable to execute and produce the cake that you had requested.

What you see above is an example of a poorly executed cake order!

It's critical to choose a broker who is dedicated to high-quality execution and transparency.

In other words, when the broker executes your orders, it should be dedicated to treating you fairly.

Let's go back to the beginning of the story with Batman and Spider-Man:

I believe it will rise from its present price of 1.4100. To start the bet, I'll put down $20.

Spider-Man senses that the GBP/USD exchange rate will continue to rise, so he stalls by pretending not to hear Batman.

Hello？ Did you hear what I said？ Spiders, unlike snakes, are not deaf. To start the bet, I'll put down $20.

What was it again？ So you want to place a wager？ My GBP/USD exchange rate has changed. It's now at 1.4150. Do you still want to place a wager？

What the hell, dude. I thought you said the GBP/USD exchange rate was at 1.4100. Now you're going to raise the price？

That's the new price I've set for myself. So, do you want to join us？ You'd better hurry before I raise my fee once more.

Fine. I'm all for it. I believe it will rise from its current level of 1.4150.

Notice how Spider-Man offered to “fill” Batman's order for 1.4100 at first, but then altered the price to 1.4150.

By 50 pips, Batman was “slipped.” That's not acceptable.

If you're unfamiliar with the above narrative, you haven't studied our prior lesson on How Forex Brokers (Kinda) Work, in which Batman and Spider-Man make cameo appearances. It is strongly advised that you study this lesson first.

What is the Order Execution Policy of your broker？

Customers should be informed about how their orders are executed by forex brokers.

It should be able to provide a document called “Order Execution Policy” in most cases.

This document outlines how their trading platform executes your orders in order to achieve the best potential outcome for you.

Before assessing a broker further, you should have an explicit order execution policy in place so you know how your orders will be handled.

Keep an eye out for the following:

· The procedure followed in selecting the company's price suppliers.

· The method for choosing hedging counterparties (“LPs”) for their customers' trades.

· The procedure for deciding on and monitoring the technology that will be used to fulfill consumer orders.

· When it comes to implementing customer orders, how the organization handles possible and actual conflicts of interest.

After you've read and understand their policy, there's more study to be done!

Here are some questions to ask to help you assess the quality of your broker's order execution:

· What level of commitment does the broker have to order execution quality and transparency？

· How much of their order processing is automated？

· What is the average currency pair spread？

· How quickly are trades completed？

· What is the average speed of execution？

· How many orders are carried out with slippage？

· What proportion of trades are completed successfully？

· How many orders are carried out with positive slippage？

· How many orders are carried out with negative slippage？

What is the broker's level of commitment to order execution excellence and transparency？

Brokers who are devoted to fair pricing and timely order execution demonstrate their commitment by being transparent and sharing execution statistics publicly.

These brokers give out execution data reports on a regular basis, which include information like average execution speed, average spreads, the ratio of trades performed at the demanded prices (no slippage), and the percentage of trades executed with both positive and negative slippage.

Typically, these reports are available on the broker's website. If you are unable to find it, contact the broker and make a demand to see it..

How transparent is their order execution process, apart from order execution reports？ Do they reveal the following information:

· What types of liquidity providers (LPs) do they have on board？

· What ratio of total volume does each LP provide？

· Is there exist any information on any LPs with whom you have close ties, conflicts of interest, or joint ownerships？

· Is there exist any information on any special agreements made or received with any LPs, like payments made or received, discounts, rebates, or non-monetary benefits？

· Does it describe how the broker approaches different client groups differently and how order execution differs depending on the customer？

If they are unable to provide one or declare that such data or information is not available to the general public, you should consider swapping to a broker who promotes transparency and fairness in the retail forex market.

How much of the order fulfillment process is automated？

There are unscrupulous brokers who manipulate order execution conditions to their advantage.

Can your broker clarify their order-execution process to you？

Is the whole thing automated？ If not, are they able to describe instances in which manual intervention is required？

What is the average currency pair spread？

The broker presents two rates on its trading platform:

The higher the price (“ask”), the better the possibility for you (the client) to BUY (“go long”).

You (the customer) can SELL (“go short”) at a lower price (“bid”).

The broker's pricing are the sum of both of these prices.

The spread is the difference between the bid and ask price.

What is the average spread per currency pair that the broker makes available to its customers？

Is it possible to break down data on spreads by hours？ For example:

· Throughout ALL trading hours, what is the average spread per currency pair？

· During ALL trading hours, what is the average spread per currency pair？

· During PEAK trading hours, what is the average spread per currency pair？

· During NON-PEAK trading hours, what is the average spread per currency pair？

How quickly are trades completed？

What is the average time it takes for a transaction to be completed？ This is sometimes referred to as “execution speed.”

The time between when the broker receives your order and when it is executed is referred to as execution speed.

The higher the speed, the larger the volume of transactions that can take place. More crucially, the faster the speed, the more likely it is that a broker's customers will be able to buy or sell at the price they want.

Inquire about the broker's typical execution speed.

It should be shorter than 0.1 second (or 100 milliseconds).

Also, find out about the percentage of trades that are completed in less than one second.

If your orders take longer than one second to complete, you're likely to see slippage since prices have moved before your order is completed.

Prices in the forex market can fluctuate in milliseconds, so if your broker's execution speed is too slow, the price you choose to trade on may have changed by the time the broker is able to process your order.

How many orders are carried out with slippage？

When you find a price on your broker's trading platform that you want to trade at, your broker is supposed to do everything possible to fill your order at that price.

When carrying out orders, the broker must take ALL necessary efforts to provide the best potential outcome for their customers, considering a variety of criteria. This is referred to as aiming for “best execution.”

In a perfect world, getting the “best possible result” means getting the price you asked for.

However, while pricing is the most significant consideration while looking for the greatest implementation, it is not the only one.

This means that the price you demanded could not be the price at which your order is fulfilled.

Slippage occurs when you are charged a price that differs from the one you requested.

Traders most at times concentrate on the spread, ignoring slippage unless it is glaringly clear when one of their orders is filled.

Slippage isn't always a bad thing because any variation between the targeted execution price and the actual execution price counts as slippage.

Market prices can fluctuate rapidly, causing slippage between the time a trade order is processed and the time it is completed.

Slippage can occur for a variety of causes, the most common of which being price fluctuation.

Slippage (both positive and negative) becomes more common as price volatility rises. Slippage becomes less common when price volatility reduces.

This is why traders most at times observe increased slippage during high-volatility periods, such as during breaking news or economic data releases, or when a former US president used to send out erratic tweets before his account was suspended.

Slippage should be rare in normal market situations, and the extent of slippage should be modest, if your broker cares about execution quality.

What ratio of trades are completed successfully？

When an order is performed successfully, it is implemented at the requested price or better.

Market and limit orders can be used to further break this down:

· How many market orders are fulfilled “at or better”？

· How many limit orders are fulfilled “at or better”？

The term “filled” or “filled order” refers to an order that has been performed.

Entry orders (to create a new position) and closure orders (to close an existing position) can both be used with market and limit orders (that close an existing position).

A market order is a demand by a trader to their broker to implement a trade at the best available price as soon as possible.

A limit order instructs the trader to implement the trade at a price that is higher than the current market price.

Limit orders let you select the lowest price at which you'll sell or the highest price at which you'll buy.

How many orders are carried out with positive slippage？

When your order executes at a more favorable price than the price you demand, this is referred to as positive slippage.

(The opposite of price improvement is negative slippage, which occurs when your order executes at a lower price.)

Is it possible for the broker to tell you what ratio of executed trades were implemented a lower price than what their customers requested？

And, in terms of pips, what is the average positive price improvement each order？

The pip difference between the demand and implemented price of orders with the improved price is used to describe this.

Market and limit orders can be used to further break down orders:

· How many market orders are filled at a better price than the one requested？

· How many limit orders are filled at a lower price than the one requested？

Let's imagine you're looking to acquire EUR/USD right away.

You log on to your forex broker's trading platform, check the price of 1.1050, and click “Buy.”

So you intended your market order to be implemented at a price of 1.1050.

The order is placed, and you are notified that your buy order for 1.1049 was fulfilled (1 pip below your requested price).

You suffered positive slippage of 1 pip since the order was filled at a lower price (1.1049) than you requested (1.1050).

How many orders are carried out with negative slippage？

When your order executes at a less favorable price, this is known as negative slippage.

Shady brokers use software that allows them to slip traders small sums of money on every trading request. It's like “death by a thousand cuts,” when traders are losing a couple of pips on every trade. It's for this reason that you inquire about their negative slippage statistics.

Is the broker able to tell you what proportion of trades were executed at a lower price than what their customers requested？

And, in terms of pips, what is the average negative price improvement each order？

The pip difference between the requested and executed price of orders with the lower price defines this.

Market, limit, and stop orders can be used to further break this down:

· How many market orders are filled at a lower price than the one requested？

· How many limit orders are filled at a lower price than the one requested？

· How many stop orders are served at a lower price than the one requested？

Let's imagine you're looking to buy EUR/USD at the current rate of 1.1270.

So you enter a limit order with a price of 1.1270 on your trading platform and click “Buy.”

So you intended your limit order to be executed at the price of 1.1270.

The order is submitted, and you receive confirmation that your buy order was filled at 1.1273 minutes later (3 pips below your requested price).

You received negative slippage of 3 pips because the order was filled at a lower price (1.1273) than you requested (1.1270).

When traders check to see what spread and slippage they get on a transaction, it's usually after it's OPENED, and they don't bother (or forget) to check when it's closed. This is something that shady brokers are well aware of. They'll sit tight and not meddle because they know you'll be monitoring when you open a transaction. They'll sneak in the extra slippage after the order has been closed.

Do you have any suspicions regarding why your order was not fulfilled at the price you requested？

Brokers may have the ability to manage and add “slippage” and/or delay the execution of your transaction on their trading platform, resulting in your order being completed at a lower price.

Brokers, for example, can intentionally inject negative slippage into order execution, where the order will execute if the price favors the broker.

However, if the price does not benefit the broker, the price is dropped and requoted with a new price that does.

You can get a post-trade execution report if you're unsure why your order wasn't executed at the required price.

Your broker should be able to provide you with written documentation demonstrating that it executed your order in compliance with its Order Execution Policy and information about its order execution arrangements within a reasonable time period if you ask for it.

Retail forex brokers in the United States, for example, are obligated to provide certain order execution data to their consumers upon request.

Price data for the 15 transactions in the same currency pair that occurred immediately before and after the customer's transaction is included. This allows their consumers to double-check that the prices they're being offered are comparable to market values.

Final Thoughts

Different order execution procedures are used by forex brokers, and none of them are “correct” or “bad.”

What determines if a broker is good or not has little to do with the A-Book or B-Book, but rather with how the organization operates.

Don't assume that terms like “A-Book,” “STP,” or “ECN” indicate a good broker.

An A-Book broker can just as readily operate against the interests of their customers as a B-Book broker.

Any broker has the ability to keep customer funds, provide inadequate pricing, manipulate order execution processes, and lie to them.

What matters most is that a forex broker:

· Provides transparent pricing that closely match the “actual” (institutional) FX market in real-time and

· Fills orders at specified rates without delay, regardless of the execution method used.

You want to work with a broker who can:

· Is forthright about the dangers and risks of leveraged trading

· Is open and honest about its pricing policies.

· Is transparent about how it carries out orders

· Processes withdrawals as soon as possible.

· Has strong risk management policies in place

· Is well-capitalized (and so unlikely to fail)

· Has a systematic mechanism in place to handle consumer concerns in a timely and equitable manner.

· Is licensed and regulated in a number of states (especially where you live)

If a broker's website does not provide clear information on all of the above, call them personally and inquire.

If your broker refuses to answer any of your questions, inquire as to why.

Any broker who believes he or she is free from scrutiny should be avoided.

Before depositing real money and opening live trades, always consider how a broker works.