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Exploring the Depths of Price Levels and Market Impact in the Brokerage Industry

Written by Feng Zhou  Senior Market Analyst Feng Zhou


In this comprehensive analysis, we delve deeper into the intricacies of pricing within the brokerage industry, extending the foundational knowledge established in the first three articles of this series. This exploration focuses on the nuances of spreads, price levels, and their variability across different brokers, offering a more thorough understanding of these dynamics.

Understanding Price Levels in the Over-the-Counter Market

The Over-the-Counter (OTC) market, characterized by its simultaneous transactions and varying prices for identical assets, often results in price discrepancies between different market maker feeds, even for the most liquid assets. The advent of electronic trading and algorithms designed to exploit arbitrage opportunities across diverse liquidity pools has minimized these discrepancies. However, they still occur, particularly during periods of reduced liquidity.

For instance, consider a scenario where low trading volumes are present for a specific instrument. A substantial market order in such a situation can significantly influence the asset's price. This price movement in one liquidity pool (say, Pool A) triggers a ripple effect due to arbitrage, causing other pools to adjust similarly. Conversely, an erroneous price in Pool B, perhaps due to a technical glitch or human error, might create a substantial shift, but this is less likely to be mirrored by other pools unless they redistribute this erroneous price.

Reasons for Differing Price Levels

Price level variations across different venues typically arise from:

Handling Misquotes

When misquotes occur, brokers using the affected price provider might display different prices than those who don't. Brokers often investigate these discrepancies, and if a misquote is confirmed, industry practice usually involves canceling trades that benefited from the incorrect price and compensating those adversely affected. At Exness, for instance, while we avoid removing client profits due to misquotes, we do ensure compensation for clients negatively impacted and strive to minimize future occurrences.

Price Inconsistencies Due to Tick Filtering

Differences in prices can also stem from tick filtering strategies employed by brokers, especially post-market news, to manage system load and execution speeds. These practices, while managing risk, may not fully reflect real market movements, leading to partial visibility of price changes in the primary market.

The Dynamics of Spreads and Slippage

In the OTC market, the coexistence of different prices for the same asset highlights the absence of a singular, accurate reference price. A realistic assessment of the market involves considering prices at which significant volumes can be traded. For example, a broker might showcase narrow spreads, but actual trade execution at large volumes may involve substantial slippage due to limited availability at the advertised spread.

Consider broker B, offering a minuscule spread for small lot sizes on EURUSD. However, as the trade size increases, the spread widens significantly. This illustrates how larger orders can lead to slippage and execution at broader spreads, evidencing the 'market impact' where the liquidity at the desired price level is insufficient.

Exness: A Model of No Market Impact

At Exness, we maintain a policy of filling all client trades at the observed spread, keeping our spreads stable throughout the day. This approach demonstrates our commitment to transparency and client success, contrasting with practices where low volumes at tight spreads attract clients but don't necessarily benefit them in larger trades.

The Importance of Broker Selection

For traders, choosing a broker with a robust balance sheet and consistent, reliable spreads regardless of position size is crucial. Given the inherent variability in the OTC market, differences in pricing algorithms, latency, risk management techniques, and occasional technical errors, some level of pricing variation among brokers is inevitable. While exact price matching across different brokers at all times is improbable, understanding these dynamics is vital for informed trading decisions.

As we continue to demystify brokerage pricing, our next article will delve into how we at Exness craft our pricing strategies, offering transparency and insight into our approach. Stay tuned for an in-depth breakdown in the upcoming installment.

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