What is a primary of Prime broker in Forex?
A professional forex trader will haven’t any difficulty in answering the question of what reasonably NDD brokers work. Most seasoned traders can even provide you with full answers about the execution mechanism of retail clients’ orders at STP or ECN brokers. However, there’s a completely different category of brokerage firms called Prime of Prime (PoP) brokers. this text will discuss the character of those styles of brokers and the way they act as a bridge between Tier 1 liquidity providers (major banks and other financial institutions) and firms operating within the retail forex markets.
What is a primary of Prime broker?
Establishing communication channels within the interbank market is that the beginning in establishing a forex brokerage company to serve individual traders or so-called retail clients. However, this needs companies to satisfy variety of strict criteria required by banks to grant said channels of communication with the interbank market. This process requires high costs to fulfill both capital requirements and technological capabilities. most significantly, this process requires high-level contacts with the powerful banking departments to line up Prime of Prime companies. In other words, creating a brokerage of this sort requires establishing relationships which will not be available to everyone and this is often where the Prime of Prime broker comes in.
The PoP broker provides all the mandatory tools so the typical forex broker can founded his company and begin his activities within a brief period of your time. It’s like offering turnkey business solutions that only require the push of a button to induce started. The Prime of Prime broker has access to first-class liquidity and has the technical expertise to get liquidity from the interbank market and deliver it to the retail broker in real time. Using the financial services industry’s standard protocol, Financial Information Exchange (FIX), a PoP broker is in a position to supply aggregated data feeds to popular trading platforms like MetaTrader 4. Here the question arises about the distinctive aspects of the work of a true PoP broker? There are some basic features that are only available via PoP brokers.
Distinctive features of Prime of Prime broker
Acting as a PoP broker requires the subsequent characteristics:
Having a working relationship with Tier 1 liquidity providers with the chance of exposing their identity without hesitation.
Route all orders issued by the retail broker to the liquidity provider. The PoP broker doesn’t use any reasonably settlement or internal risk management mechanism (in part or in whole). Thus it is safely said that there’s no conflict of interest between PoP brokers and their retail broker clients.
The use of advanced and effective technologies to make sure the steadiness of the workflow and therefore the ability to expand at any time. The retail broker is additionally supplied with data feeds in a very secure and controlled manner.
Working under the B2B model, which suggests that cooperation is proscribed to investment, retail brokers and other financial institutions. In rare cases, the activity of a main of Prime broker is also a part of several activities related to the financial services industry, and for this reason may sometimes handle individual traders.
Why is there a requirement for PoP brokerage services?
In the aftermath of the 2008 global financial crisis, Prime of Prime brokers (tier 1 liquidity providers) drastically reduced their activity with high-risk clients. Small and medium-sized investment have also been subject to strict scrutiny by banks, while these funds usually act as prime brokers. If the bank finds that the securities firm doesn’t meet the specified capitalization standards, it doesn’t hesitate to chop its relationship with it in keeping with Basel 3 laws. Basel rules currently require banks to keep up a capital adequacy ratio (CET1) of no but 4.5%. In their quest to satisfy this ratio and meet regulatory standards, banks have significantly reduced the leverage offered to retail forex brokers.
Some important events also contributed to the current trend, like the Swiss central bank’s decision to abandon the peg of the franc to the euro and also the scandals of manipulation of charge per unit benchmarks because it prompted banks to further reduce their leverage levels and increase margin requirements. We don’t forget here that leverage is that the lifeblood of the retail broker’s work, at a time when only a limited number of brokerage firms have the flexibility to line aside uncountable dollars in separate accounts with banks. don’t forget also that the retail broker has to work with variety of major brokers so as to confirm that it obtains the simplest prices for its clients, which increases the financial burden to satisfy the business requirements. This step, i.e. multiple sources of liquidity, is crucial to the success of the nondepository financial institution, because it provides it with the flexibility to cut back re-quotes and execute orders at an appropriate speed. Finally, the retail broker has to allocate a major amount of its capital to hide the prices of rapidly emerging technical upgrades. coping with a PoP broker helps address all of those products and allows the retail broker to specialize in attracting customers without being overburdened with financial burdens. we will summarize the benefits that retail brokers get from managing PoP brokers as follows:
A number of PoP brokers maintain working relationships with several liquidity providers, which ensures that their retail brokers customers receive competitive quotes in a very timely manner, while reducing slippage and increasing order execution – which together gives a chance to boost the efficiency and quality of services Mediation provided.
Ease of linking the info feeds provided by the PoP broker with several trading platforms.
Providing modern and advanced technologies to make sure a secure and stable trading environment.