Understanding the Source of Forex Broker's Prices
Article 9 from 12
Ever wondered where your forex broker gets those fancy prices from? Are they real or just some made-up numbers? Let’s uncover the truth and find out where these prices actually come from!
The Ask and Bid Prices
Let’s cover the basics first. In the forex market, there are two key prices that you need to know: the higher price, known as the “ASK,” at which you can buy or go long, and the lower price, known as the “BID,” at which you can sell or go short. The difference between these prices is called the spread.
Can Forex Broker Show Any Prices it Wishes?
Now, here’s the catch: your forex broker may show any prices it wishes. As a retail trader, you cannot directly access the institutional or “interbank” FX market. Instead, you rely on a retail forex broker to speculate on currency exchange rates. This means that the prices offered by your broker may or may not reflect prices available elsewhere from other brokers.
Unlike exchange-based markets, the forex market operates as an over-the-counter (OTC) market. There is no centralized public exchange and, therefore, no single “market price” for each currency pair. This lack of a centralized exchange means that there is no equivalent of a consolidated data feed that provides unambiguous reference prices for every forex broker to adhere to.
So, How do Retail Forex Brokers Source Their Prices?
Reputable brokers base their prices on the prices of other FX participants, typically banks and non-bank financial institutions, known as liquidity providers (LPs). A group of LPs forms a liquidity pool, and it is from this pool that the broker obtains the reference prices for currency pairs.
On your trading platform, you see the bid and ask prices for each currency pair. These quotes, known as a “price stream,” are based on the prices that your broker receives from the liquidity providers. The broker aggregates these prices in real-time to find the best available bid and ask price. It’s important to note that the bid and ask prices may come from different LPs, depending on the liquidity available.
How to Ensure You Are Getting Fair Price
To make sure that you are getting a fair price, you need to take certain steps and ask the right questions. Here are some stuff that you need to consider:
- Reputable Brokers: Select a broker with a solid reputation and a track record of fair pricing. Look for reviews and feedback from other traders to gauge their credibility.
- Price Sourcing: Ask the broker how they determine their prices. A reputable broker should be able to clearly explain that they source prices from non-affiliated third-party liquidity providers (LPs). These LPs should be reputable and independent entities, ensuring that the prices closely follow prevailing market rates.
- Independent Verification: Inquire about how the broker verifies the prices received from their LPs. They should have measures in place to ensure that the prices are independently and externally verifiable. This could include using multiple price sources or partnering with reputable data providers.
- Spread or Markup: Understand how the broker applies spreads or markups to the prices received from the LPs. This information should be clearly disclosed and explained. Ideally, the broker should have competitive spreads that align with market norms.
- Evidence and Documentation: Request evidence or documentation that supports the broker’s claims about price sourcing. This could include audit reports, agreements with liquidity providers, or any other relevant documentation that verifies their practices.
By conducting thorough research, asking the right questions, and seeking evidence, you can make an informed decision and choose a forex broker that provides fair and transparent pricing.
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