Execution Quality is just as important as Safety of Funds when it comes to choosing a broker. If quality of execution is poor, an IB's clients will eventually get fed up and close their accounts.
The problem is that most traders pay no attention to the quality of a broker's execution when they're going to open a Forex account. Why is that? Because they have their eyes set on the carrot being dangled in front of their faces: the spreads. Spreads are typically the first topic of conversation for clients. "What is your spread on the EURUSD?" "How tight are your spreads?" "What kind of spreads do you offer?" Clients are not the only ones obsessed with the spreads they see on the platform. IBs are also guilty of this sin.
Let us walk you through a symbolic example to prove why this is a mistake. Spreads represent the cover of the book and execution quality the content. When clients and referring agents continue to judge an FX book by its cover, they ignore what is truly important, the actual pages inside. Tight spreads are only meaningful if the execution is fast and the broker is not dealing against the customer and "pulling strings" behind the scenes. If the clients of the IB are experiencing a high trade rejection rate due to re-quoted prices, execution delays, and platform crashes or freeze-ups, the tightest spreads in the world don't mean a thing, even if the spreads on all currency pairs were zero (0)!
In conclusion, introducers should put high quality of trade execution, not tight spreads, on their list of top priorities. After all, this is what will determine the long-term success of their referral business.
When "Bad" Execution is Not the Broker's Fault
Clients love to point fingers at their brokers whenever a trade gets rejected or an execution is delayed. Who can blame them? After all, this is a learned response due to the brokerage shenanigans they've enjoyed for decades. But in all fairness, it's not always the broker's fault. Let us explain.
"Instant" execution in any financial market (including foreign exchange) is a myth. Even though clients assume that they will get filled at the price they see and click on their computer screens, this is only wishful thinking. Latency, or the time (delay) it takes the order to get filled after leaving the client's platform, is an unavoidable part of life. It is physically impossible for an order to be filled instantly. Here's why.
Traders sit a certain physical distance away from their brokers. The longer the distance between the customer and the execution server of the Forex broker, the longer the time it will take for the order to be filled; in other words, the greater the latency.
In their financial white paper, Design Best Practices for Latency Optimization (December 2007), industry leader Cisco Systems indicated that the propagation (or travel) delay for electronic data in the real world is close to 0.82 milliseconds (ms) for every 100 miles of distance. Let's assume that an FX trader in Beijing clicks on "Buy EURUSD" and his or her broker's execution server is in New York. What happens? Well, the straight line distance between New York and Beijing is approximately 6830 miles, which corresponds to a latency of 56ms.
"Fifty-six milliseconds?! That's nothing!" you may add. Even though it may look small to the untrained eye, it is not. Furthermore, it will actually be a lot greater in the real world, given the fact that the signal won't travel in straight line, but in an unknown path determined by multiple computers and networks along the way. The speed and reliability of the trader's internet connection will also be a factor in the speed equation. At the end of the day, the Beijing trader might be lucky if his or her order arrives in 100 ms or less. In 100 ms, a lot of things can happen. The price could tick higher past the trader's acceptable price, causing the order to be rejected or placed on hold (depending on the trading platform and settings used to process the order). Another possibility is for other orders to hit the execution server prior to the arrival of the order from Beijing, causing it to be placed on a waiting list and resulting in additional execution delay.
These delays might give the trader the impression that the broker's quality of execution is poor, when the real person to blame is Mr. Physics!
Forex News Trading and Execution Quality – Another Las Vegas?
Forex news traders are a dime a dozen. This group, either manually or using automated order execution systems, fires orders off during important economic releases or news. Depending on how far away the released figures are from what the market expects, news traders will buy, sell, or do nothing.
The problem with this type of trading is that the liquidity environment created during news is the most unpredictable of all. Before, during, and right after important releases, the banks and liquidity providers that make the market in FX move their prices and order sizes erratically, sometimes getting out of the market entirely. This liquidity chaos makes trading during news time extremely risky, since traders might get filled at prices sometimes hundreds of pips away from their desired entry points. Even when dealing with honest brokers that have a very high execution quality, this is a likely scenario. As a result, many of the losses news traders incur are not their brokers' fault. For this reason, we urge introducing brokers who teach their clients how to trade not to condone or encourage this type of Las Vegas-style gambling. This will go a long way in preserving your clients' capital and the longevity of your IB business.