How are the Forex orders executed

Hello, friends, Forex traders! Today we will discuss very important, but often skipped by traders principles of the execution of the orders on Forex. We talk about when the orders are displayed on the interbank market, what is a price glass, at what price are pending, market, stop-loss and take-profit orders executed, as well as a little bit about the liquidity aggregators.

The principle of FX work

At first, imagine a normal market. Buying something on the market, you have two options: buy a product at a price that the seller offers or try to trade to bring the price down. In the first case, you are guaranteed to receive the instrument at the stated price. In the second case, you can get the instruments at a better price, but also can lose everything. But, the execution of the orders on the Forex market doesn’t differ much.

In fact, the trader must distinguish only two types of orders - with and without limited slippage. In the first case, you are willing to buy only at the declared or better price. In the second case, you just tell the broker that you are ready to buy a declared amount for any currently available price.

In terms of MT4, their analogs are Instant Execution and Market Execution. When the order is executed at a different price from the declared one, a slippage is formed. That is, the slip is considered to be the difference between the requested price and the actual price at which the order was executed. As a result, your order can either be executed exactly at the stated price or with some slippage in one or another direction.

Orders glass

Generally, a glass of orders on Forex is a table containing current sell and buy orders from various liquidity providers. Glass is unique to each instrument, and contains the demand (Bids) and supply orders (Asks). Spread is a difference between the best Bid and Ask prices. Market sell orders are always executed at the best Bid price, and the buy orders - at the best Ask price.

Each price in the glass corresponds to a certain volume. Let’s say you have sent a buy order for 20 lots, and at the best price, but there are only 10 lots at the moment. In this case, part of the order will be executed at the best price, part of it by the next price, and so until the entire order amount is filled. The trader will have a slippage in this case, and the opening price will be equal to the average execution price of the glass.

Aggregators and slippage

Consider the example of a simple liquidity aggregator. Each broker works with several counterparties (liquidity providers). Each counterparty provides quotes, at which they (probably) will be ready to make a transaction. Sorting quotes from the best price to the worst, the broker creates an orders glass, where each counterparty is represented by two prices: buying and selling.

On the MetaTrader chart in the Market Watch window, you always see only the best prices, in this case, 8 for purchase and 7 for sale. As you see in the example, the second contractor has the widest spread, which means it will get far fewer orders from customers. Thus, in order to gain as much client liquidity, providers are fighting for the best places in the glass, narrowing the spread.

Why do the orders slip then? To begin with, all pending orders are stored on the broker’s, or on an aggregator company’s server. The broker cannot know in advance, which of the suppliers will receive the order, so at the time of the activation request is sent to the supplier with the best price at the moment.

Suppose, we set a stop order at buy at a price of 9. Within a second, the order is activated, and the broker sends a request to the liquidity provider to open a position predetermined volume at the best currently available price.

But, the fact is that until the request reaches the supplier (fraction of a second), the price may change. For example, the price jumped up and you cannot buy for 9 anymore, then the provider can execute the order at the price of 11. After that, the terminal trader sees an open stop-buy order with a 2-point slippage (9 - announced price, 11 – execution price).

What is the Instant Execution

The Immediate Execution term, for you to understand, is the same limit order. That is, such an order will never be executed at a price worse than stated. When a trader sends a request to the broker, the second one receives a request in the form of a specified customer price and the current price of the instrument. If the broker agrees to execute the order precisely at a specified price, he takes it. If the conditions don’t satisfy him, broker offers the trader a price with guaranteed execution (requote). Now, the trader has an opportunity to accept or reject it.

To increase the likelihood of execution, you can specify the maximum order slippage size. This application shows that you are ready to buy/sell at a price of no worse than ten points from the declared one.

If the actual price is different from the stated one for more than 10 points, the broker may refuse the order and offer to perform it at a different price. In this case, you have a few seconds to accept the new conditions.

If the broker approves the bid, the order will appear on the chart.

What is the Market Execution

In the case of market execution, sending an order to the server, you agree in advance with any price that the broker offers. This warning is at the bottom of the form for new orders.

In other words, your order will be executed with almost 100% guarantee, but at the price at which the supplier will be able to execute it. The downside is that in this case, the trader doesn’t have any control over the slippage size. Therefore, some brokers have begun to offer their own additional conditions for order execution, so that the traders can adjust the size of the maximum slip in advance. If properly implemented, it can be even better than the standard Instant Execution.

Summarizing, we can say that the market execution in the case of availability of additional settings, offers far more options for execution customization. The main difference is that in the event of a sudden movement, you will receive a requote with immediate execution, or slippage in the case of market execution. Today, there is no fundamental difference for the trader, as a rule, in both cases, it is possible to adjust the size of the maximum slippage.

A Book and B Book orders

There are two types of execution types in a glass: A booking and B booking. Orders from customers of A book category are redirected to external counterparties (interbank market), while the B book orders will be executed by the broker himself through internal clearing. There are brokers having only A booking or B booking, or working on a hybrid model (most often).

The hybrid model increases the profitability of the already profitable MM algorithm. Identifying large and steadily profitable clients, the broker is trying to cover counterparties positions with their orders, while leaving most of the unprofitable customer orders within the company. In turn, B Book for an ECN broker is their own customers’ orders, which may be matched (executed) automatically, provided there is a counter order from another client. That is, if the broker has sufficient liquidity within the company, you have a good chance to get on a counter bid from another trader. For a broker the scheme is profitable as it allows not to share the commission with liquidity providers, working as an exchange.

B book orders are executed most quickly. In the case of A book extra time is needed to send orders to the counterparty, and receive an answer from it. Therefore, when the DC begins to put the orders on the interbank market, traders can feel a noticeable deterioration in the speed of execution.

Pending orders

All pending orders are normal market or limit orders with a deferred activation. You leave the broker a request to open an order, and when the price reaches a specified price level, the broker sends a request to the supplier.

In Metatrader, there are 2 main types of orders: stop order (the same Buy Stop and Sell Stop) and limit order (Buy Limit, Sell Limit). When stop orders are activated, the broker sends a normal market request to the supplier without slippage restrictions. When activating a limit order, the broker sends a limit request to the supplier, which can be fulfilled only at a fixed price or better.

Stop-loss is also related to the stop-orders, but stop-loss is always associated with a particular transaction. When the price reaches the level of the loss limits, the broker sends the order to the supplier on the market performance. Accordingly, if the prices are already obsolete or a gap occurs (price gap), the order will be executed at the first price, which will be available and the actual execution price may differ from the set one. A stop order to buy is always exposed only above the current price level, a sell stop order only below the price.

Limit orders can be distinguished by the fact that the slippage on them can be only in a positive direction. Limit orders guarantee execution at the price specified in the order, but do not guarantee that the order will be executed. On a real interbank, you can open a limit order at a price slightly worse than requested, then the probability of execution increases. In the MetaTrader terminal, you can set limits at the market, or higher than the price in the case of Sell Limit or lower than the price in the case of Buy Limit.

The Take Profit level is an analog of a limit order and will be executed only at the requested or a better price. That is, slippage can only be positive. An order cannot be closed by Take-Profit, even if the price reaches the level in the terminal.

Thus, the liquidity provider can get either a market or a limit order. It may happen that when a broker receives the quote and sends a request to the supplier, and gets the information that there are no bids for a given price and there is no order to be executed, although the chart clearly shows the level of touch. The absence of execution guarantee is the cost of the OTC market.

Conclusion

There are two extreme types for order execution: either order execution precisely at a specified price, but not guaranteed; or a guaranteed execution, but at any available price. Scalpers and those, who need high precision of entrance, usually work with limit orders. Those traders, who need to collect a sufficient amount for a long-term position, usually use markets and stop orders.

Regards, Michael

ForexTraderPortal.com