How the orders are executed in Forex

Исполнение ордеров на Форексе

Recently one of the leading brokers has offered its clients a new account type for exchange trading — Pro-ECN. The broker assured that the operation of the orders occurs faster at the expense of a dedicated server and technologies at the conclusion of the applications of traders in the ECN, where the transaction are performed at the best price. If you test both new and old accounts on the subject of speed of execution of orders in the Forex market, the difference is almost unnoticeable, but for the real pros who value the fraction of a second, the expense can really be interesting. However, the barrier of entry (minimum deposit) is rather high.

Execution of orders in Forex

In the previous article we partiallycovered such thing as Instant Execution and Market Execution, as well as talked about the ECN, combining liquidity providers from around the world, the varieties of ECN accounts — STP and NDD. Judging by the questions, it makes sense to focus on the specifics of order execution in Forex in more details and simple words.

Forex is a market where there are assets that are bought and sold. As in a normal market here, someone puts the sale price, and someone who does not agree with the price, offers own, trying to bargain. And if the seller disagrees, the buyer goes in the market in the hope that someone will offer the product cheaper. Forex trader have to distinguish between two types of order execution:

  • Instant Execution. Execution without slippage, that is, at the price mentioned by the trader, or its failure;
  • Market Execution. The order is either executed with a slippage in one direction or another. In other words, the trader gives the broker an indication of the purchase the stated amount of the asset at any price.

Handling of orders occurs in the glass. Glass is a kind of table containing the current applications for the purchase or sale of the asset is different from liquidity providers. Each exhibited in a glass price corresponds to the volume of lots (logical, since at a given price, the volume of demand or supply may be restricted). For example, you want to buy 20 lots at a price of $ 10. In the case of market order execution part of the lot will be satisfied at the best price ($10 in this case), and in relation to the rest of the application will be applied the term “slippage”.

How do the liquidity providers work

Each broker works with different (multiple) liquidity providers, which are investment banks or financial companies. Each counterparty grants the broker the request, which lists the price of interest to the counterparty. Broker sorts the quotes and places them in a glass, where every counterparty is represented by the price of purchase and sale.

order execution process

In the terminal window only the best price is displayed (in this case, 8 and 7). The figure above shows that the 2nd counterparty has the highest spread, and then it will get the least number of applications. Because to get “its place in the glass” liquidity providers cut the spread, partly losing their profits.

As the aggregator can be a financial company, on the servers of which information about the request is accumulated (it can also be accumulated on the broker server). The broker does not know which of the suppliers will send the order. For example, we place a request to purchase the lot for the price of 9.

execution at the best price

Theoretically, this order can be done by the 3rd broker, but until the request reaches the provider, the price may rise, for example, up to 12, and then we get slippage of 3 pips.

Instant Execution — execution of orders in the Forex market for better price. That is, if the price, until the signal went to the supplier, increased buying, the order will not be executed. More precisely, he will propose new terms (requote) and traders decides whether to agree or not. However, while the trader will speculate (valid for I up to 5 seconds), the price may again go up. Therefore when placing an order in advance it is recommended to put the magnitude of the slippage that is acceptable for the trader.

It is believed that this kind of order execution inherent in brokers that do not submit bids of the  traders in the foreign market. If the role of liquidity provider and counterparty itself acts as a broker, it is logical that he is able to execute an application on the price exposed by the trader.

Market Execution — execution of orders at the market price, i.e. the price that would be at the time of the transaction. If in the first case, the order may not be executed, here it will be executed with almost a 100% guarantee, but at the price offered by the broker.

The disadvantage of this execution — the likelihood of slippage, so the trading is not performed with such accounts on volatile markets and at the time of the news release. But the time of the signal from the trader to the liquidity provider are reduced to a minimum.

And a few words about pending orders:

  • stop orders (buy stop, sell stop) are triggered (sent by broker) without limiting slippage;
  • limit orders are triggered only on exposed or best price.

Stop loss refers to stop orders, but may be closed at the first available price, if contractors were not found on established one. Better situation is with limit orders. If the stop loss allows slippage for the worse for the trader side, then limit works only in the best.

Summary: Any trade for the novice trader starts with learning not only of strategies, but also of how many binding instruments there are, which also include the orders. For example, for scalpers, for which slippage is eliminated better a limit order to long-term strategies — stop orders. Execution of orders in the Forex market is specified in the terms of the trading account, however, if the broker is not a “kitchen”.

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