Why Do Different Forex Brokers Have Different Prices - Study
The forex market is a global financial market that involves the exchange of currencies in pairs. Traders exploit the rise and fall of currencies against other currencies to make a profit. As the currencies are the same around the world, one would think that the prices would be the same across different broker sites. However, that is not the case.
In this article, we are going to be exploring this phenomenon. We want to answer the question, why do different forex brokers have different prices? Let’s jump in.
How Does Pricing In The Forex Market Work?
Banks and large financial institutions trade currency pairs with each other on a global market called the interbank market. In this decentralized marketplace, the banks and financial institutions determine the actual price of currencies depending on the economies of different countries.
As traders cannot access this interbank market, forex brokers act as the middlemen. They simply provide a link between traders and liquidity providers who are part of the interbank market. So why would prices be different if all liquidity providers are part of the interbank market? Well, there are several reasons that we have discussed below.
The spread is the difference between the buying price and the selling price on a broker site. This is usually the main method that brokers use to make money. As brokers feature different spreads on their trading sites, the resulting currency prices might be slightly different. A broker that offers tight spreads may be nearer to the interbank pricing of currencies. In contrast, a broker with wide spreads may greatly deviate from the interbank pricing.
The regulations stipulated upon a forex broker can greatly affect the prices it passes to traders. For example, if a broker’s regulations lead to increased operational costs, they could pass part of the cost to traders. This can lead to slight hiking of prices for certain currencies. Moreover, regulators may require brokers to remain within certain price limits to ensure a fair trading environment.
Different brokers have different liquidity providers. Unfortunately, this may cause a price difference. Some liquidity providers may simply take too long to update prices after receiving them from the interbank market. This delayed price update may translate to some brokers remaining slightly off with the prices they issue to traders.
The Trading Platform of a Broker
This goes without mentioning. The trading platform of a broker greatly affects the prices that stream to traders. Usually, the brokers with advanced trading platforms will be quicker to update prices as sourced from liquidity providers. Contrarily, a slower trading platform updates prices slower leading to discrepancies in the market. Couple this with slow liquidity providers and the price difference on the market can be significantly different from time to time.
The Trading Session
While the forex market runs 24 hours 5 days a week, there are four main trading sessions that open and close at different times during the day. The various trading sessions in forex trading include the Sydney session, the Tokyo session, the London session, and the New York session. Each of these trading sessions has markets that are dominant when they are open. For example, the Sydney session includes the Australian and New Zealand markets. During this time, the Australian Dollar and the New Zealand Dollar are the most active currencies and their prices can fluctuate every second.
If a broker takes a significantly long time to update prices during trading sessions, it can lag behind. In turn, traders may see different prices on different broker sites.
Mode of Execution
Different brokers use different order execution models in the market. In this piece, we are going to use three main execution styles to explain how prices can differ from broker to broker. Specifically, we will use the example of ECN brokers, STP brokers, and market makers. ECN stands for Electronic Communication Network. This is a system that banks and other financial institutions use to trade currencies with each other on the interbank market. ECN brokers use this technology to source raw prices directly from the interbank market.
In comparison, STP stands for Straight Through Processing. STP brokers use this model to pass prices straight from the liquidity providers to the traders. Finally, market makers use a dealing desk and take the other side of a forex trade. As such, they make their own prices in order to make money.
Evidently, the mode of execution a broker adopts can greatly affect the prices that traders see on a broker site. As ECN brokers source prices straight from the interbank market, prices can be significantly lower. Contrarily, market markers usually have the highest pricing as they try to maximize their profits. Finally, STP brokers usually fall in between these two in pricing.
The same currencies can have significantly different prices from broker to broker. This is something that may baffle a lot of traders. There are many factors behind this phenomenon as we have discussed in this article. The various factors include liquidity providers, the spreads of a broker, the regulatory status, the trading platform of the broker, the trading session, and the mode of execution of a broker. We hope this piece helps you figure out why you may see different prices on different broker sites.