How forex orders are executed
Hello, comrades Forex traders! Today we will discuss the very important, but sometimes ignored by traders, principles of the execution of forex orders. We will talk about in what cases orders are displayed on the interbank market, what is a glass of prices, at what prices pending, market, stop-loss and take-profit orders are executed, as well as a little about liquidity aggregators.
FX working principle
For starters, imagine a regular market. When buying something on the market, you have two options: buy the product at the price that the seller offers or try to bargain to bring down the price. In the first case, you are guaranteed to receive the goods at the stated price. In the second case, you can get the goods at a better price, but you can also leave with nothing. Fundamentally, the execution of applications in the forex market is no different.
In fact, a trader only needs to distinguish between two types of orders - with and without slippage restrictions. In the first case, you express a desire to buy only at the declared or more favorable price. In the second case, you literally tell the broker that you are ready to buy the declared volume at any price currently available.
In MT4 terms, these are analogues of Instant Execution and Market Execution. When the order is executed at a price different from the declared, slippage is formed. That is, slippage is considered to be the difference between the price set in the application and the actual price at which the order was executed. As a result, your application can either be executed exactly at the declared price, or with some slippage in one direction or another.
Glass of orders
In a simple view, a glass of Forex orders is a table containing current buy and sell orders from various liquidity providers. The glass is unique for each financial instrument, and contains the demand (Bids) and offers (Asks). Spread is the difference between the best bid and ask price. Market sell orders are always executed at the best bid price, and buy orders at the best ask price.
Each price in a glass corresponds to a certain volume. Let's say you sent a buy order in the amount of 20 lots, and at the best price at the moment there are only 10 lots. In this case, part of the order is executed at the best price, part at the next one, and so on until all the volume indicated in the application is filled. In this case, the trader will get slippage, and the opening price will be equal to the average execution price in a glass.
Aggregators and slippage
Let's look at an example of how the simplest liquidity aggregator works. Each broker works with several counterparties (liquidity providers). Each counterparty provides quotes at which it (possibly) will be ready to complete the transaction. Having sorted the quotes from the best to the worst, the broker forms a glass of applications (market slice), where each counterparty is represented by two prices: buying and selling.
On the chart in MetaTrader and in the market review window you always see only the best prices, in this case, 8 for purchase and 7 for sale. As can be seen from the example, the second counterparty has the widest spread, which means that it will receive much fewer orders from customers. Thus, in order to gain as much customer liquidity as possible, suppliers are fighting for the best places in the glass, narrowing the spread.
Why then do orders slip? To begin with, all the deposits are stored on the server of the broker, or the company acting as an aggregator. The broker cannot know in advance which of the suppliers the order will be sent, therefore, at the time of activation, the request is sent to the supplier with the best price at the moment.
Suppose we set a stop order for a purchase at a price of 9. At the next tick, the order is activated and the broker sends a request to the liquidity provider to open a position of a given volume at the best available price now.
But, the fact is that until the request reaches the supplier (fractions of a second), the price may change. Suppose the price jumps up and you can’t buy 9 anymore, then the supplier can execute the order at the price of 11. After that, the trader will see an open stop order for the purchase with a slippage of 2 points (9 - the declared price, 11 - the strike price) .
What is Instant Execution?
The term Immediate Execution, for you to understand, means the same limit order. That is, such an order will never be executed at a price worse than declared. When a trader sends a request to a broker, he receives a request in the form of the price indicated by the client and the current price of the instrument. If the broker agrees to execute the order exactly at the indicated price, he executes it. If the conditions do not suit him, the broker offers the trader his price, with guaranteed execution (requote). Here, the trader already has the opportunity to agree to the terms or refuse.
To increase the likelihood of execution, the application can indicate the size of the maximum allowable slippage. Such an application means that you will be ready to make a transaction at a price not worse than ten points from the declared one (five-digit).
If the real price differs from the stated one by more than 10 points, the broker may reject the application and offer to execute it at a different price. In this case, you have a few seconds to accept the new conditions.
If the broker approves the application, the order will appear on the chart.
What is Market Execution?
In the case of the execution of orders on the market, sending an order to the server you agree in advance with any price that the broker will offer. This warning is at the bottom of the form for opening a new order.
In other words, your order will be executed with almost a 100% guarantee, but at the price at which the supplier can execute. The downside is that the trader, in this case, has no control over the size of slippage. Therefore, some brokers began to offer their own add-ons for order execution, so that traders could adjust the size of the maximum slippage in advance. If implemented correctly, it might even be better than the standard Instant Execution.
Summing up, we can say that market execution, subject to the availability of additional settings, offers much greater opportunities for tuning performance. The main difference is that in the case of a sharp movement, with instant execution you will receive a requote, and with market execution - slippage. Today, there is no fundamental difference for the trader, as a rule, in both cases there is the possibility of adjusting the size of the maximum slippage.
Orders A book and B book
According to the method of execution, orders in a glass are divided into A booking and B booking. Orders of clients from the A book category are redirected to external counterparties (interbank market) when the B book orders are executed by the broker himself due to internal clearing. There are brokers practicing exclusively A booking or B booking, or working on a hybrid scheme (most often).
The hybrid model increases the profitability of an already profitable MM algorithm. By identifying large and stably profitable customers, the broker tries to block their orders with positions at counterparties, while leaving most of the orders of unprofitable customers inside the company. In turn, for the ECN broker, B Book is an order of the company's own clients, which can be matched (executed) automatically, provided that there is a counter order from another client. That is, if the broker has sufficient liquidity within the company, you have a non-zero chance to get on the counter order from another trader. For the broker, this scheme is also profitable, since it allows you not to share the commission with liquidity providers, working on the basis of the exchange.
Orders from the B book are executed the fastest. In the case of A book, additional time is added to send an order to the counterparty and receive a response from it. Therefore, when the DC begins to withdraw applications for the interbank market, traders may feel a noticeable deterioration in the speed of execution.
All pauses are ordinary market or limit orders with deferred activation. You leave a request to the broker to open an order, and when the price reaches the specified price level, the broker sends a request to the supplier.
There are 2 main types of orders in the Metatrader: a stop order (the same Bai Stop and Sell Stop) and a limit order (Bai Limit, Sell Limit). When a stop order is activated, the broker sends the supplier a normal market request without slippage. When a limit order is activated, the broker sends a limit request to the supplier, which can be executed only at the set or best price.
Stop loss also applies to stop orders, but stop loss is always associated with a particular trade. When the price reaches the limit of loss, the broker sends the supplier an order with execution by market. Accordingly, if prices are already outdated or the level falls into the gap (price gap), the order will be executed at the first price that will be available and the actual execution price may differ greatly from the set price. A stop order to buy is always set only above the current price level, a stop order to sell is only below the price.
Limit orders differ in that slippage on them can only be in the positive direction. Limit orders guarantee execution at the price set in the application, but do not guarantee that the order will be necessarily executed. On a real interbank market, you can open a limit order at a price slightly worse than the stated one, then the probability of execution will increase. In the MetaTrader terminal you can set market limits either above the price, in the case of Sell Limit, or below the price in the case of Buy Limit.
The Take Profit level is an analogue of a limit order, and will be executed only at the declared or more favorable price. That is, slippage is possible only in the positive direction. An order may not be closed by Take Profit, even if the price reaches a level in the terminal.
Thus, the liquidity provider can receive either a market order or a limit. It may well happen that the broker receives a quote and sends a request to the supplier, to which he answers that there are no offers at this price and the order is not executed, although the chart will clearly show the level touch. Lack of performance guarantee is the cost of the OTC market.
When choosing the type of order, one of two extremes is usually chosen: either the execution of the order at exactly the specified price, but not guaranteed; or guaranteed performance, but at any affordable price. Scalpers and those who care about high accuracy of inputs usually work with limit orders. Those traders who are interested in gaining sufficient volume for a long-term position usually use markets, the same market and stop orders.