“Are you old school or new school as a Retail trader?”
Since we recently covered Instant Execution we felt it was only right to cover the alternative type of execution available for traders, “Market Execution”.
Market Execution is a type of execution which was predominantly seen in Institutional FX platforms, prior to Retail, where traders would trade in the actual FX market against Liquidity Providers, as opposed to trading directly against a Broker. As Retail Brokers began moving their business models away from taking counterparty risk they introduced Market Execution in order to earn their revenue solely through mark-ups. To fully accommodate this type of execution, Brokers introduced the STP/ECN model, reducing their risk as all trades flow directly to a LP who provides pricing while also taking the counterparty risk for each trade.
So what differentiates Market Execution from Instant Execution? Quite a lot actually, Market Execution is a form of execution which depends primarily on the liquidity which is available at the time you are trading, if there is not sufficient liquidity available at the requested price then the trader may receive a partial fill, a fill at a much worse price or they may even have their trade rejected by a Liquidity Provider, while with Instant Execution, traders expect to be filled at their requested price or requoted, eliminating the risk of a fill worse than their request.
When trading using Market Execution, the prices at which traders are executed are known as VWAP (Volume Weighted Average Price) prices. When trading through this type of execution, traders must take into account the Depth of Market and the Liquidity (Amount of tradable volume) available on each tier, as the rate at which their trades are filled will be fully dependent on the rates and volume of each tier.
The big attraction for Instant Execution is the safety of being filled at your requested price, this is especially true for traders who like to trade during the more illiquid Asian session or whom like to trade more exotic currency pairs. There is the possibility of receiving a requote, however you will never be entered into a trade at a price you did not request or accept. The same cannot be said for Market Execution, where traders are subject to the actual market and the liquidity available, illiquidity either during a session or at volatile times, can result in traders receiving slippage on their fill due to a poor VWAP or a sharp market move at the time of their entry. It’s always good to remember that once you click to enter the Market you are subject to the actual market and how it behaves at this time, this can often result in the rather infamous “negative slippage” (to which we will dedicate a whole article).
Even though there are some drawbacks to Market Execution it does offer clients quicker execution and a greater level of transparency when trading in the FX market. Many traders prefer Market Execution as they can see the whole book and the liquidity available, something which many believe aids their decision making in terms of choosing their trade entry as it gives a greater market overview.
So as we have mentioned in the past, Market vs Instant is purely down to the trader and their preferences. It is very clear that both execution types have their benefits which suit different traders and it may simply be a case that your trading style is better suited to Market Execution or Instant Execution, whichever you decide it is always important to understand the execution you are getting and the potential pitfalls you are subject to with both types of execution.
Instant Or Market, The choice is Yours.
Ask your broker for accounts with Market Execution and Instant Execution and decide which one responds to your needs!
Yes, you are right. It does not matter for demos :)