How are Forex orders executed?

Forex orders execution is something traders may not pay much attention too. In fact, for most traders, trading is confined to technical and or fundamental analysis.

Trade execution doesn’t really rank that high when it comes to outlining the most important aspects in trading.

Knowing what happens when you place a forex order can give you  far better insights into how the trades are processed.

In this article, we’ll learn about how orders are executed, especially in terms of forex brokers.

To keep it simple and concise, we’ll only focus on online forex brokers. There are many times when you might placed a market order and have it rejected. This is true, regardless of whether you are trading with a dealing desk or a non-dealing desk forex broker. The reason many vary.

From issues such as the market moving quite quickly to the broker limiting how close to the market you can place an order.

To understand forex trade execution process, one must first know the types of orders that can be placed.

They are broadly classified into Market Orders, where you buy or sell at the current market price, or pending orders where your order is triggered only when your specified price is reached. However, it doesn’t end quite there as there is a more deeper, complex process that eventually decides on whether your order is filled or killed.

How are orders processed with a Forex Broker

Orders are processed differently based on the forex broker that you trade with.

As you might know, forex brokers can be classified into those with a Dealing Desk and Non Dealing Desk. Then, depending on the type of the order, the trade can be executed differently. In this section, let’s take a look at how the forex orders are processed.

Order Processing – Dealing Desk Broker

When trading with a Dealing desk broker, your orders are filled by the brokerage. Read this research article on limit orders in the financial markets.

In most cases, your BUY or SELL order is filled by the brokerage taking an opposite position to your trade. This is usually the case with a market market or a dealing desk forex broker.

So if you were to BUY EURUSD at 1.302 with a dealing desk broker, your order would be filled by the brokerage taking a SELL order at 1.302.

Obvious from this, one party has to win, while the other loses. In most cases, a dealing desk broker opts for any of these following methods to match your orders. We stick to the most simple ways of matching orders.

  • Match your forex orders with another client: The most risk free way for a market maker to trade would be to match your order against another of their trading clients, this way the broker makes their spread market from both ends. However, such execution cannot be always filled if the broker has a low volume of clients.
  • Match your orders directly: The most common way is for the broker to match your order, in other words, take an opposite position to your trade. This happens when there are no clients who are willing to BUY or SELL at your price. This is risky because the brokerage can see losses should the market move in your favor
  • Match orders but hedge the risks: In cases where there is a strong move in the markets in one direction and when the broker is forced to take the opposite end of your trade, the brokerage can actually open another position (similar to yours) in the markets to offset their risks

Conflict of interest and re-quotes

As you can see from the above, there is a considerable risk involved when trading with a dealing desk broker.

Many traders complain about the way forex orders are handled when dealing desk brokers. There are recorded instances when a forex broker cut off their winning clients from trading. Some traders are also put under supervision so the forex broker does not incur further losses.

The dealing desk broker’s model is often cited in their ‘Conflict of Interest Policy‘.

Another issue with order execution is ‘Re-quotes‘ which is common when trading with a dealing desk broker.

A re-quote is nothing but an alert telling you a new market price is available than the one you wanted to place an order on. Re-quotes are common with market orders. While there might be legit reasons for a re-quote (for ex: during high market volatility), dealing desk brokers use re-quotes to their advantage. This is done in order to fill your price ‘they‘ consider better for their counter party trade.

Order Processing – Non Dealing Desk Broker

Non dealing desk brokers make money either by charging commissions or adding a spread mark up to your price.

However, they do not trade against their clients but pass on these orders either within their existing client base or onto their liquidity network.

The liquidity network is made up of large institutions as well as a couple of other NDD brokers. The Straight Through Processing  model automatically matches your orders against other clients within the same network.

Forex Order Execution – NDD & DD Brokers

Rogue forex brokers can take advantage of order execution due to its complexity. They often advertise themselves as a non-dealing broker. However, it is only when the orders are executed, do you realize the truth. Re-quotes and limitations are nothing new for such type of fx brokers.

But having said that, there are also some legit non-dealing brokers. Such brokers mention upfront on how they make money. From charging a commission to adding a mark-up, it is all clearly mentioned. So, it is important for you as a trader that you read up on the terms and conditions.

So the question of whether you should pay attention to how your orders are executed, comes down to that of personal choice. For experience trades, order execution plays an important role, and it is obvious that such traders prefer a non-dealing desk broker.

For the most part, where the retail trading group is made up of novice traders with low volumes, you could be excused for not wanting to know about the order execution.

You can avoid the unpleasantness of forex order execution. Just make sure to read more about your forex broker before you start trading with them. This is especially true, if you are a news based trader.