Typically, forex brokerage firms operate their retail and institutional clients separately—for example, by establishing separate trading systems for each client type and assigning them different sales desks or trading platforms, while the trading processes for each client type are managed by distinct IT systems. But is this all about to change?
The differences between retail and institutional forex trading primarily lie in scale, purchasing power, and the trading systems used to execute and manage these transactions. Although brokerage firms may handle a relatively small number of institutional trades, the value of each individual trade far exceeds the profits generated by retail trades.
However, there is currently a trend toward bringing both types of foreign exchange trading onto a single platform through the same trading and settlement systems. Although a $1,000 trade and a $100 million trade have different capital requirements, order routing, and risk management, trading system designers are increasingly moving toward consolidating their software into a unified platform.
Differences in Fund Pools
Because individual retail trades take longer to settle, brokerage firms often bundle together many small retail forex orders for processing in order to offer clients lower transaction costs and reduce execution time.
This is not the case with large institutional trades, where settlement can be completed separately and as quickly as possible. System designers for each type of trade are busy adapting their software to manage different types of clients. Of course, not all systems require such extensive adaptation. State-of-the-art foreign exchange trading and settlement platforms are capable of handling both types of trades.
Differences in Hedging
Managing retail clients is a field that requires the development of multiple systems and involves a detailed analysis of trade aggregation; the methods and processes for managing them differ significantly from those used for institutional clients.
Simplified foreign exchange system solutions certainly have their place, but post-trade solutions may present some challenges.Banks attempt to exclude retail transactions from their IT workflows because they incur funding costs, slow down transaction settlement, and increase market risk. Although the aggregate value of numerous small transactions may exceed that of a single large institutional transaction, small transactions cannot command the high commissions associated with large institutional trades.
Regulation also plays a role in this.
Generally, many retail trading platforms are subject to stricter regulation than platforms catering to institutional investors , as retail traders are considered less sophisticated and in greater need of protection against fraudulent activities. In reality, however, compared to institutional investors, retail clients themselves prefer a more relaxed trading environment and less oversight, so that their trading activities are less restricted and they can access better products and services.
Finally, although the requirements of retail and institutional clients may differ, brokerage firms can save significant costs in terms of time, effort, and capital by consolidating the foreign exchange trading platforms for these two markets.
