New NFA rules about Price Slippage and Requoting
Starting from March 26, 2012 the new NFA rules about Price Slippage and Requotes come into effect.
The rules are aimed to set a level playing field for brokers and traders, so that when slippages or requotes occur, they will no longer be “one-sided, mainly favoring brokers” (e.g. executed at the best price when the slippage (requote) favors brokers, and at the worst price when it favors traders). Instead brokers will be required to set up their trading systems in such way that they offer equal opportunities for both sides in the market.
Straightening up this order handling process will provide additional clarity & honesty into the Broker-Client relationship.
The Official Document
More information on the new Interpretive Notice can be found in NFA’s September 2, 2011 Submission Letter to the CFTC. Questions concerning the Interpretive Notice should be directed to Lauren Brinati, Director, Compliance at [email protected] or Carol Wooding, Associate General Counsel, at [email protected].
Source: www.nfa.futures.org: Effective Date of NFA Interpretive Notice to NFA Compliance Rule 2-36 regarding Price Slippage and Price Requoting
Details: How Slippage & Re-quotes Work
• The FDM (Forex Dealer Member – a broker) set the maximum losing slippage
(i.e., slippage that was unfavorable to the customer and favorable to the FDM)
at a much wider range of pips than the maximum profit slippage (i.e., slippage
that was favorable to the customer and unfavorable to the FDM). As a result,
a customer was much more likely to have an order filled when the market move
was unfavorable to it than when the movement was favorable to the customer.
• The FDM set the limit on the number of contracts in an order that could be
executed that experienced losing slippage for the customer at a much higher
number than the limit on the number of contracts in an order that could be
executed that experienced profitable slippage for the customer. As a result, a
larger sized order that moved against the customer was much more likely to be
executed than a smaller sized order that moved in the customer’s favor.
• The FDM only passed negative slippage on to the customer. If the FDM was
able to offset the customer’s order at a better price than the price at the time the
customer submitted its order, the FDM did not give the customer the better price.
However, if the FDM offset the customer’s order at a price that had negative
slippage and was unfavorable to the customer, the FDM would thereby benefit
from the slippage and fill the customer’s order at the offset price.
In each of the above instances, the FDM’s asymmetrical slippage settings allowed it to
manipulate the prices that the forex customer received and allowed the FDM to benefit
from the order slippage to the detriment of the customers.
For NFA regulated brokers in the United States and their clients this will no longer be an issue.
New rules like this is all a part of regulating the Forex market in order to ensure fair and ethical business between parties. It makes trading less one-sided, and forces risk management to be put in the forefront of clients minds to help protect them. We would always recommend that you choose a broker that is certified by a regulatory body.