There are numerous advantages for a trader able to execute fast trades… At least, that it what we are told by so many brokers. Why do Forex Brokers advertise their fast execution speeds so rigorously? And are there actually advantages to fast trade executions? This article hopes to provide some insight into what benefits a fast execution broker can provide, when a trader might need such execution and when fast execution is actually a factor to consider when selecting a Forex broker.
The main advantage that fast execution provides is decreasing the risk of slippage. The time it takes for the order to be opened by a trader is known as latency. Within this time volatile price movements might occur due to market conditions. As such, a trade meant to be opened or closed at a certain price level, is unlikely to be processed at that price since some time has passed between the initial ordering of the trade and it finally being processed. Usually latency speeds are within seconds, some brokers offer latency speeds below one second (calculated in milliseconds), regardless of this, the risk of slippage is impossible to completely eradicate. Nevertheless, the lower the latency, the less time for slippage to occur and therefore the less risk involved. Slippage can be potentially quite costly, good brokers will spend time and effort trying to reduce this risk by investing in the technological infrastructure.
It’s worth noting that fast execution speeds are mostly an advantage when trading with a non-dealing desk broker. After all, a dealing desk broker creates their own internal market. Even if your trades are traditionally opened quickly, if the broker wishes to delay or stall the order, they can do so. Brokers will do this because they open trades against their clients, which creates a conflict of interest. Furthermore, requotes can negate the traditional advantages that fast execution provides. As such, most traders will find that trading with a Market Maker does not yield many advantages with fast trade executions.
Trading with an ECN + STP broker will usually offer the most benefits to fast trade execution. Since orders are made directly to Liquidity Providers, the inherent conflict of interest that exists for market makers is removed. It is usually in the broker’s best interests to process the order as soon as possible for their clients in order to remain competitive among other brokers. A true ECN Forex broker won’t requote or trade against their clients. As such, the advantages that low latency offers are no longer negated.
Low latency also allows for more flexible strategies for traders. Many hedging and scalping EAs often rely on fast execution times. These auto-trading robots will benefit a great deal from a good technological infrastructure. Furthermore, low latency will allow for more trades to be opened up one after the other. Multiple trades can be opened for high frequency trading, a technique commonly used by hedge funds and professional traders. Even just a 10% decrease in latency can mean 10% more trades being opened or closed in the same period of time. This is very beneficial security wise, especially if the market movement begins to turn badly. The more orders closed quickly, the faster you reduce your exposure. This is a similar effect in regards to reducing the risk of slippage.
So what measures can you take, as a trader, to reduce latency? The main thing you need to do is find a good Forex Broker with fast execution times. It would be prudent and probably recommended to find an ECN+STP broker with an active interest in processing your orders quickly. Other potential steps to take may be to use a VPS or a FIX API system, check with your broker whether these would prove useful, how much it would cost and whether or not the broker offers such FX trading tools at all.