How do banks and online forex brokets treat stop loss orders differently?
How do banks treat stops?
A bank triggers a stop when the market trades at that price and then goes bid or offered there depending on whether it is a buy or sell stop.
For example, a buy stop would get triggered when the stop price trades and then goes bid there and vice versa for a sell stop.
In reality, a bank may treat different customer orders differently, depending on the relationship. I am not privy to whether banks give preferential treatment to the better customers but assume that they get more leeway for their stops.
I can’t speak for how banks operate today but in the old days bank traders would use stop loss orders to either front run it or use it as protection to buy ahead of a sell stop or sell ahead of a buy stop.
How do online forex brokers treat stops?
By contrast, online forex brokers execute a buy stop when its offer is at the stop price and a sell stop when its bid is at the stop price.
For example, let’s say a trader leaves a buy stop at 1.0560. The atop would be triggered at a quote of 1.0559-60, even if the market never traded at 1,0560.
Similarly, a sell stop at GBPUSD 1.2775 would be triggered when the broker quote is 1.2775-77, even though the maket has not yet trader at the 1.2775 stop loss price..
When trading with a forex broker, the wider the spread the easier it is to get stopped out when the price gets close to a stop even if the market never actually trades there.
The explanation for this is that an electronic platform can only execute a buy order (e.g. a buy stop) at the offered price quoted and a sell order (e.g. sell stop) at its bid price. This gives a big advantage to the online broker as it can execute a stop before the market actually trades there.
Of course, not all online forex brokers are the same. While I do not have firsthand knowledge, I assume there are some brokers who take advantage of customer stops to run them while the more reputable ones play it straight..
There is also a difference between B-book brokers who take the other side og=f customer trades and ECN broker who passon all trades to their liquidity providers,
So, you can see the difference the way banks and online brokers handle stops. If a retail trader places a sell top, for example, at USDJ[Y 149.10, it should actually be placed below that level if you are looking to exit a
position only if that level trades. This is not an issue for stops placed with a bank.i
ILLUSTRATION OF STOPS BEING RUN
A word of warning for retail trader
Beware of slippage during periods of widening spreads, such as at the end and start fo a new trading day (5PM NY time), at the closa of a week and just before and especially after a key news release.
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