There are 3 common methods for a broker to provide its platform with a rate-feed. Choosing a certain method usually means conceding accuracy against speed, or vice-versa.
Assessing a rate-feed quality requires the involvement of various technologies such as: huge tick-history databases representing a substantial amount of market data-sources and benchmarks, efficient backtracking engines which can cope successfully with such amount of data, statistics and reports which are human-readable and meaningful for research, advanced comparison systems and algorithms, and, of course, successful market practice. This is why most brokers never get the right decisions and keep alternating their chosen method forever.
Here are the main differences between the various methods:
Retrieving your Forex price feed from a larger broker:
“What’s good for them is good for me” is the common thought when a small-medium broker elects to copy rate data from larger ones. It is just that this thinking ignores basic principals:
- Large brokers DO have spikes and arbitrage opportunities.
- Large brokers may have a technological ability to block trading when their feed is suspected to be off-market in some cases. You can copy their rates, but not this ability. And even those who have this ability, are still vulnerable in many cases (since in most times they do not really know when their feed goes off-market).
- Platforms manipulate feed (whether due to spread adjustments, rounding of digits, slow processing, usage of filters, etc). Platform input feed always differs than its outbound feed. Therefore, larger brokers may have one feed coming in, but when you quote them you actually copy a different, less-accurate and slower feed.
Retrieving your Forex price feed from a bank or an ECN:
“Who can be more accurate than a bank/ECN?” is what users of this method believe. This thought is completely wrong:
- Banks/ECN’s feeds are faster than those of most retail brokers, but are definitely not accurate. This will reduce exposure to latency arbitrage, but increase exposure to severe spikes (which could result in a worse outcome).
- ECN’s generally operate on a no-risk-policy, as all (or most) of their processed trades are performed between a trader and a liquidity provider. An ECN does not really care for the parties P/L as it would profit from commissions and not exposure. An off market trade will either hit the liquidity provider (not the ECN), or result in cancelling the trade after it is performed. Even brokers that completely hedge their trades against their ECN risk their Stop Loss and Take Profit orders when they off-quote an ECN. They also risk their hedged trades, which can be cancelled by the ECN in a later stage. Brokers that do not hedge each trade are obviously very vulnerable to the many arbitrages generated by ECN’s off-market rates.
- Some banks operate on an ECN no-risk model, so their behavior would be the same as the ECN behavior explained above. Others bear some risk and therefore are vulnerable to arbitrages and have to rely on their systems to block trading in some cases (similar to large retail brokers as explained above).
In-house Forex price feed algorithms:
“We can filter spikes” is what some people believe. They try to develop “tradeoff algorithms” that do the following:
- Filter rate changes larger than X%: When X is too low the broker is likely to filter changes in a fast moving market (resulting in a very slow response and high vulnerability to arbitrages). When X is too high, the broker is likely not to filter most spikes (resulting in high vulnerability to arbitrages and falsely caught Take-Profit/Stop-Loss orders). Users of this method change the “X” value very often, and quickly learn that there is no right general “X” value and that filtering rates is an impractical method.
- Block trades on certain market conditions (high spreads, high volatility): This is an attempt to take care of a tree but not its roots, as it ignores the real cause of the problem: your feed. No broker really knows in all cases it goes off market, and therefore it could only block some arbitrage opportunities. It also results in many trade rejects that expel honest customers. Even worse, is a situation where being off-market is causing Stop-Loss/Take-Profit orders to be either falsely caught or ignored (depending on the related configuration), Both may lead to your clients’ dissatisfaction.
Leverate is the only company to offer a full solution: There is no tradeoff in our feed. Backed by dozens of market sources and technology that generates the right rates, we are the only company to provide a feed that is always accurate, always fast and fully monitored to ensure that our clients receive our rates the way they should.