Understanding slippage and the consequences of unfair execution – Guest editorial
“Perhaps for some brokers, STP has another meaning: Straight To Pocket.” – Jon Grah, CEO, AwarenessForex
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 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:
1.Frontrunning their order
2.Giving asymmetric slippage
3.Providing false or misleading prices
4.Not safeguarding client funds (mainly via segregation)
5.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. AwarenessForex research team keeps a private list of who’s who for brokers, taking into account the likelihood that a broker will abuse their position. And it goes well beyond a simple regulation check.
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 order manipulation?
Jon Grah is the CEO of AwarenessForex, and is a highly experienced developer of fully automated trading signals which are designed for managed accounts, hedge funds and proprietary trading firms. He has extensive experience over several years in developing automated strategies and working with brokers and high net worth individuals globally, and has been an active research and development professional in several MT4/MT5 price action move indicator projects.