Understanding Slippage and the Consequences of Unfair Execution
- Brokers can unfairly insert execution delays on several order requests, creating massive slippage.
Clients (mainly traders and asset managers of derivatives brokerages) invest significant time to develop and deploy strategies that will hopefully generate profit. A derivatives broker is expected to execute client trades in the best interest of their clients, which includes not trading against their clients.
Not only is this professional behavior, but it is also a legal requirement of MiFID 1/2 and equivalent laws that outline how brokers should handle their fiduciary responsibility to their clients.
A client expects that their chosen Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term Straight Through Processing broker will act in the best interest of their clients first when handling their orders. This would include executing a client’s order as fast as possible without trading against their client. This includes:
- Frontrunning their order,
- Giving asymmetric Slippage Slippage In financial trading, slippage refers to the difference in price between the price an order was intended or expected to be filled and the actual price an order was filled. Slippage is a very contentious issue among retail traders, which can lead to issues. Many traders view levels of slippage at brokers as a key determinant for their business. For example, in forex trading, if a trader places a trade intending to enter a buy on the EUR/USD at 1.1080, but they only get into the market at a price In financial trading, slippage refers to the difference in price between the price an order was intended or expected to be filled and the actual price an order was filled. Slippage is a very contentious issue among retail traders, which can lead to issues. Many traders view levels of slippage at brokers as a key determinant for their business. For example, in forex trading, if a trader places a trade intending to enter a buy on the EUR/USD at 1.1080, but they only get into the market at a price Read this Term,
- Providing false or misleading prices,
- Safeguarding client funds (mainly via segregation),
- Causing asymmetric or artificial order delays between different clients or different accounts without a specific reason (technically bait and switch, but also related to asymmetric slippage).
Lets watch and see what happens when an offending broker intentionally delays orders.
When a broker trades against their client’s instructions, it does more than cause a client to potentially generate [greater than usual] losses. The losses can then have a domino effect in causing either clients and/or other stakeholders (hedge fund, private equity, pension funds, allocators, etc) to lose confidence in the trader/asset manager. The trader could be blamed or the track record that took months or years to build is irrevocably tarnished.
Perhaps for some brokers, STP has another meaning: Straight To Pocket.
How fast should orders be executed? Do you think a 3 minute delay to execute an order is too long? Have you experienced broker order delays or other forms of negative manipulation? Let me know in the comments below.
This article was written by Jon Grah, a Trading Signals Automation Specialist at AwarenessForex.com. Mr. Grah develops and trades intraday automated trading systems for hedge funds, prop firms, select private clients that boldly demand high alpha. He has over 16 years of combined trading experience in the financial markets, including designing one of the first zero-lag price measurement tools: APAMI.
Clients (mainly traders and asset managers of derivatives brokerages) invest significant time to develop and deploy strategies that will hopefully generate profit. A derivatives broker is expected to execute client trades in the best interest of their clients, which includes not trading against their clients.
Not only is this professional behavior, but it is also a legal requirement of MiFID 1/2 and equivalent laws that outline how brokers should handle their fiduciary responsibility to their clients.
A client expects that their chosen Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term Straight Through Processing broker will act in the best interest of their clients first when handling their orders. This would include executing a client’s order as fast as possible without trading against their client. This includes:
- Frontrunning their order,
- Giving asymmetric Slippage Slippage In financial trading, slippage refers to the difference in price between the price an order was intended or expected to be filled and the actual price an order was filled. Slippage is a very contentious issue among retail traders, which can lead to issues. Many traders view levels of slippage at brokers as a key determinant for their business. For example, in forex trading, if a trader places a trade intending to enter a buy on the EUR/USD at 1.1080, but they only get into the market at a price In financial trading, slippage refers to the difference in price between the price an order was intended or expected to be filled and the actual price an order was filled. Slippage is a very contentious issue among retail traders, which can lead to issues. Many traders view levels of slippage at brokers as a key determinant for their business. For example, in forex trading, if a trader places a trade intending to enter a buy on the EUR/USD at 1.1080, but they only get into the market at a price Read this Term,
- Providing false or misleading prices,
- Safeguarding client funds (mainly via segregation),
- Causing asymmetric or artificial order delays between different clients or different accounts without a specific reason (technically bait and switch, but also related to asymmetric slippage).
Lets watch and see what happens when an offending broker intentionally delays orders.
When a broker trades against their client’s instructions, it does more than cause a client to potentially generate [greater than usual] losses. The losses can then have a domino effect in causing either clients and/or other stakeholders (hedge fund, private equity, pension funds, allocators, etc) to lose confidence in the trader/asset manager. The trader could be blamed or the track record that took months or years to build is irrevocably tarnished.
Perhaps for some brokers, STP has another meaning: Straight To Pocket.
How fast should orders be executed? Do you think a 3 minute delay to execute an order is too long? Have you experienced broker order delays or other forms of negative manipulation? Let me know in the comments below.
This article was written by Jon Grah, a Trading Signals Automation Specialist at AwarenessForex.com. Mr. Grah develops and trades intraday automated trading systems for hedge funds, prop firms, select private clients that boldly demand high alpha. He has over 16 years of combined trading experience in the financial markets, including designing one of the first zero-lag price measurement tools: APAMI.