Here and now, the rise of FX trading among all the other financial market stands out like a sore thumb. With decreasing cost and increasing profit opportunities, the market receives those who want to start a Forex brokerage business with open arms. However, this fast integration of the new brokers causes a problem: Toxic traders.
Like every newly established company, Forex brokers also face lots of difficulties at the very beginning. They become the center of attraction for those who want to benefit from the error in their system. Let’s look at the practices to understand how to deal with toxic flow and toxic traders.
This type of toxic trading occurs when an unexpected news release or event happens. Normally, there are a number of price updates made by banks regularly. When the water is still, brokerage businesses can adapt themselves to the price updates and take a position accordingly. But after a strong news release, traders have the power to predict the price changes thanks to algorithmic trading. Thus, they start to send a high number of trades.
While the market is positioning at a fast pace, many brokers cannot find enough time to guard themselves against the market. To prevent this situation, brokers can change or stop pricing after the release.
FX brokers use different platforms and technology software with different pricing engines. Many new brokers do not pay attention to that condition and choose the cheapest. However, this may backfire and result in latency arbitrage. Traders can place their traders on software that cannot react to the market prices in milliseconds.
This lag can create a space for traders to make profits between the market price and the software’s price. Everything is done until software price and market price meet at the same level. The solution might be to improve your software with a better pricing engine, so you can catch up with the market instantly.
Multiple Order Trading
Multiple order trading happens when the same trader makes the same trade at the exact time and price across different platforms. Assume that the liquidity provider serves different amounts of liquidity to different brokerages. While doing so, the provider believes that this asset will be traded by totally different traders on each brokerage. However, a trader can make the same trade on all the other brokerages and platforms by hitting at the same price and time.
By collecting all the trades, traders benefit from the lower price calculated by considering the lower amount for different traders. This type of trading is the hardest one to prevent, but one method would be to maintain a vigorous risk management strategy depending on different types of traders.