Over the past year I’ve noticed a new marketing tactic from FX Brokers and Institutional Liquidity Providers (LPs) which is distorting the FX marketplace and the expectations of clients and brokers who receive liquidity from such firms. This tactic is something I’d like to pen as “teaser spreads” which works as follows:
A broker or LP shows extremely tight spreads at the top of the book price (TOB)*, however, the amount of liquidity at that price is so low that the client has next to no chance of actually getting executed at that price. Therefore while the broker/client believes they are getting the best price from their LP, for the majority of trades they will actually be taking slippage and paying a higher spread than the one advertised. Below are just a few examples of live quotes taken from large brokers and LPs which demonstrate this phenomena.
Example 1
Source: http://xopenhub.pro/liquidity/
Here we see a EURUSD quote with a 0.3 pip spread. However, at the TOB Bid Price there is only 100K (1 standard lot) of liquidity available and the TOB Ask Price has only 300K (3 standard lots) of liquidity available. Considering that there are hundreds, if not thousands, of traders who are trading at the same time, the chance of being the one trader who is filled at that price is next to zero.
Also for any client who trades larger than 3 standard lots per click, they are guaranteed to take slippage since there is not enough liquidity available at the TOB price. In this example a client who wanted to sell even 2 standard lots would end up paying a spread of 0.5, which is almost double the quoted price, since they would be executed at 1.31814 (not 1.3181) with an ASK price of 1.31819 to close the trade.
Example 2
Source: http://www.lmax.com/exchange
Here we see another well-known LP who is quoting GBPUSD with a 0.4 pip spread at TOB. In this example there is only 500k (5 standard lots) available at TOB BID and 600k available at TOB ASK. If the LP received simultaneous orders for more than 500K , the fill price would be on average 1.54992 with an ask of 1.6598, making a spread of 0.6 (50% higher than the TOB Price).
Unlike other LPs and Brokers, Tripeak via FXDD (Example 3) have arranged with our LPs to quote at a minimum 10 standard lots at TOB, to ensure fair pricing and the best execution in the market. We also believe this method gives the most transparency for serious traders and brokers who need true market liquidity, instead of showing a “teaser spread” like other providers just to get a new client or broker to work with them. Therefore while we may not offer the tightest spreads in the market, you always know that our execution will be superior to other firms, because we offer more liquidity at the TOB Price.
Example 3
Source: http://bostontechnologies.com/Add-On-Solutions/depth-of-market
*TOB Price is the equivalent of the best bid or best ask price.