Honest Forex Trading

In recent years, such phenomena as price manipulation on the financial markets and fair dealing have increasingly fallen under the scrutiny of the regulators and high-frequency trading (HFT) is increasingly being blamed by the regulators for playing unfair, despite existing best practice policies both in Europe and the USA.

As technology and financial markets develop, the need for high order execution standards in decentralized markets becomes even more important in addition to existing regulations. In this regard, the Financial Commission brings to your attention some approaches to dealing with this situation.

Exchange markets and over-the-counter markets Unlike the exchange market, where the centralized process of order book formation, bid/ask formation is standardized to identify prices, in the over-the-counter (OTC) currency market (Forex), dealers form markets independently and can take prices from various sources.

Best Execution Rule

In the United States, the NBBO National Best Bid Best Offer Policy is applied, while in Europe, the Best Execution Policy is the main component of financial services regulation and is designed to ensure investor protection, transparent pricing and healthy competition among trading platforms in an increasing number of fragmented markets.

The general meaning of the Best Execution concept

Each company is obliged to take all reasonable measures to achieve the best possible result for the client, taking into account the full range of factors affecting the execution, when executing orders for operations with financial instruments on his behalf. The company is obliged to act in the best interests of the client when receiving and transferring the client's orders to other firms for execution.

The nature of the Forex market

In the US, the best execution policy does not apply to the forex market, although in Europe the MiFID directive requires the same best execution policy to be applied to all markets. In reality, the decentralized nature of the forex market makes this task difficult to implement and leads to systematic misunderstandings between dealers and regulators.

In any case, when a bank, investment company or dealer acts as a market maker, when executing customer orders, companies simply seek to quote customers as close as possible to current, interbank market prices. In this way they remain competitive, including any spreads that are added as commission.

This is because the forex market does not have a single centralized platform, and as a consequence, a price that would represent the true market at a certain point in time. Consequently, a combination of some of the dominant prices is usually used as an indicator to see where most interbank dealers are trading. Thanks to developing technologies, the difference in prices between the main providers has become extremely small, which indicates the high efficiency of the existing market.

Pricing at Forex

Price formation usually takes place on platforms such as EBS, Reuters and other electronic interdealer systems where banks and counterparties, usually the largest, can trade with each other. Prices from such sources are almost instantly spread throughout the forex market through intermediaries and data providers. Price information reaches dealers and other companies that use this data in real time when making transactions with their clients.

How do I characterize fair forex trading?

Fair forex trading means that the price available to the dealer is provided to the client without any additional changes/interference (except for spread and commission), and regardless of who will eventually act as a counterparty to the transaction and regardless of the client's current positions.

The best execution concept applies the concept of 'legitimate reliance', which can be translated as 'reasonable reliance'. This concept applies to non-professional (retail) clients. That is, there is a rule that obliges the company to act in the best interests of its clients, but the client has no control over the execution process and has to rely on the company.

In most cases, companies accept clients' orders and execute them on third parties (exchanges, dealers and other counterparties), in which case the company always acts on behalf of the client, and the client has "reasonable confidence" that the company acts in his best interests.

However, even in a situation where the company acts as a counterparty to the transactions, it may still act in the client's best interest and comply with the rule of best execution, despite the fact that in such cases the client has no "reasonable trust".