FX Liquidity STP

How STP works in FX?

STP transaction processing

The quality of your STP trade execution is dependent on a number of important factors including speed/latency, accuracy, rejection ratios and cost. I would like to take this opportunity to review some of these in greater detail.

Network latency

Fortex hosts its clients MT4 trade servers in either the NY4 or HK3 Equinix datacenters. The trade execution engine, aggregator and banks are also located in NY4, so therefore our MT4 server in NY4 is effectively “co-located” with the entire trade execution ecosystem. The bottom line is that internal latency within the NY4 cage is virtually non-existent, under 1ms.

As you may already know, latency in the transmission of orders can prove very costly when trading Forex. Latency (or lack of latency) often determines the true quality of a trade and even whether a trade is profitable or not. By utilizing our global presence, we have been able to provide a better experience for our clients by further reducing the transmission time between mainland China and the Liquidity Provider(s). The average round-trip transmission time now between our Hong Kong server and NY4 is 226 ms (milliseconds).

When discussing network connections and latency in Forex trading, one should also be mindful of “Jitter”. Jitter describes the variation in latency. With a good connection, latency tends to remain constant and doesn’t fluctuate much, however, with a bad or unreliable connection, the latency can vary dramatically over the time. For example, one moment latency can be negligible but, without warning, it can suddenly increase and seriously impact trading. Packet loss is another important factor to be mindful of, and this is where order messages are dropped en route due to breaks in connectivity.

When setting up slippage parameters for your trade strategies you should always remember to factor in the effect of latency because by the time an order reaches its destination (liquidity provider for example) the price could have moved, especially during volatile market conditions.

Multiple execution legs for large orders

Fortex is able to facilitate the supply of competitive, aggregated bank liquidity to our clients, effectively meaning that we are subscribing to price liquidity streams from the world’s top tier banks. This allows our customers to benefit from tighter spreads and reliable, transparent order execution. Because liquidity is provided by multiple banks, large-sized orders will often receive multiple fills (by multiple banks).

  1. A)For orders that are larger than the available “top-of-book” liquidity, the price book is swept in order to fill the entire amount (when a GTC, good till cancel, order is selected). In our Fortex 5 platform, you can view the entire depth of book for the instrument you are trading, before you trade. However, in the MT4 “Market Watch”, only the top of book price is shown and you have no way of knowing the liquidity available at a particular price.

In the example above, if you were to buy 1 million of EURUSD you would sweep 2 levels of the price book:

1) 500k at 1.09413
2) 500k at 1.09414

While this Depth of Market view is very useful when trading manually, an MT4 Expert Advisor cannot access this information and therefore relies on top of book pricing from Market Watch. Hence, it has no visibility into potential price slippage due to limited, available liquidity at the top the book.

  1. B)Due to the fact that multiple banks are executing different parts of the order, our system obviously needs to wait for all banks to reply with fills before confirming execution back to the client. These banks may have different execution times so it may take slightly longer to execute larger orders although, in general, we are still talking in milliseconds.

What can a broker do to improve the quality of STP execution that they provide to clients?

When a broker “B-books” all trades within the MT4 platform, order executions take place inside of the platform making execution speed almost instantaneous. A broker often regards this as a business risk and typically deploys solutions on its server in the form of auto-dealing plugins that allow for a delay in execution, protecting against toxic trading strategies, scalpers, etc.

When a broker STP’s trades (passes its trades straight through) to the market, the quality of execution is determined by the quality of the counterparty / liquidity provider and by network connectivity. In general, a counterparty that features up-to-date trading infrastructure and deep liquidity will, in turn, have good order execution.

Here are some guidelines to improve your STP execution:

  1. Deploy private internet connectivity lines. For example, if your STP liquidity provider has their execution engine in NY4 or LD4 but you have your MT4 server in Hong Kong or Australia then you may have to look into a private line or other ways of creating a stable route to the execution engine.
  2. Use a credible and reliable liquidity provider. Please read10 things you should ask when selecting your liquidity provider.
  3. Make sure that your STP liquidity provider can provide you with detailed and transparent trade reports should you ever have the need to question a particular trade execution.

What can a trader do to improve execution quality?

For the trader, getting closer to the MT4 trade server may be one of the options to improve the execution quality. A Virtual Private Server, or VPS, might be worth looking at in this respect. If your trading strategy is to use expert advisors 90% of the time or more, the VPS solution could allow you to minimize network latency.

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