As traders have become better informed over recent years, it has become harder for less scrupulous brokers to take advantage of their clients. There is, however, one old fashioned broker trick which remains – the practice of retaining price improvements.
In short, some brokers, in my view, are being less than fair to clients when it comes to trade execution prices. The FX market, by its very nature, is not static and on occasion slippage happens because of this. It is not abnormal for a broker to trade with the street and to get a worse price because the market has moved, which they will pass on to you as slippage.
The issue comes, however, when this happens the other way – how does your broker behave when the market moves in your favor? Are they retaining this profit? Profitability in the institutional space has been squeezed in recent times, and retaining price improvements is one way for a wholesale broker to make up for lost profit margins but this, in my view, is unfair to clients.
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One of the reasons why this is so prevalent is that clients are often unaware of the situation and don’t think to ask their broker about price improvements. However, it is also unlikely that the sort of broker who retains price improvements would volunteer a truthful answer if asked. The good news is that there IS a very simple way to test whether your broker is behaving fairly.
If you place a small limit order with your broker at a price that is through the market (for example, if EUR/USD is trading at 1.14583 – 1.14585, you enter a buy order for 0.01 lots at limit 1.14610), a broker that is giving you price improvements will fill the order at the market rate (in my example 1.14585). If they are retaining price improvements, they will fill you at your limit price (in my example 1.14610) thereby taking risk-free profit at your expense.
This example would cost you less than $1 but it will tell you immediately if your broker is treating you fairly. It is worth doing this test regularly as some brokers will be able to switch price improvements on and off dynamically.
This issue has been under the radar for far too long… it’s about time it was exposed and addressed.