A professional Forex trader will have no hesitation in answering the question ofwhat NDD broker is. A majority of experienced traders will also be able to explain clearly how an STP broker or anECN brokerexecutes the incoming orders from a retail client. However, there is altogether a different category of brokerage firms, which are referred to as the Prime of Prime (PoP) brokers. This article will guide you on who they are exactly and how they act as a bridge between the Tier 1 liquidity providers (top level banks or other financial institutions) and retail foreign exchange firms.
Establishing an interbank market access is the first step towards setting up a Forex brokerage firm that can serve retail traders. However, a firm needs to meet the stringent requirements put forth by banks in order to gain an interbank market access. The process is both capital and technology intensive. More importantly, high level contacts within the banking circle may be required to get the process moving forward. Thus, establishing a prime broker relationship isnot feasible for everyoneand that is where a prime of prime broker steps in.
A PoP broker will have everything available readily for a company to set up its retail FX brokerage business in a short span of time. It is almost like offering a plug-and-play business solution. A prime of prime broker will have access to a Tier 1 liquidity. Additionally, it would also have the technical expertise to offer a non-latent interbank liquidity to a retail Forex broker. Using an industry-standardFIX (Financial Information eXchange)API, a PoP will be able to offer an aggregated data feed to popular trading platforms such asMeta Trader 4. So, what distinguishes a real PoP provider? There are some unique traits that only a PoP broker would have.
have a working relationship with a Tier 1 liquidity provider and would be happy to disclose their name.
route all the orders received from the retail Forex brokerage firm to the liquidity provider. The PoP broker will not use any kind (partial or full) of in-house risk management or settlement mechanisms. Thus, it would be safe to say that there will be no conflict of interest between a PoP broker and a retail FX broker.
use a robust technology that will offer stability and allow scalability. The data feed will also be offered to a retail broker in a secure and regulated environment.
be a B2B broker, and will deal only with funds, retail Forex brokers, and other financial institutions. In rare cases, if prime of prime brokerage business is a part of several other ventures related to brokerage service, then it may deal with retail foreign exchange traders.
In the aftermath of the2008 financial crisis, prime brokers (Tier 1 liquidity firms) have considerably reduced their counterparty exposure to clients with a high risk profile. Even small and medium size funds are scrutinized thoroughly by banks, which are usually the prime brokers. If a firm is found to be undercapitalized, banks do not hesitate to break the relationship under theBasel III norm. Banks are now required to maintain a CET1 (Common Equity Tier 1 ratio) of 4.5%. To satisfy the rules, banks have tightened the leverage offered to retail Forex companies.
Incidents such as the Swiss National Banksabandonment of the cap on francs exchange rate against the euro, andcurrency exchange rate rigging scandalshave forced banks to tighten up leverage and increase margin requirements. However, for a retail Forex broker,leverageis the lifeline. Additionally, very few retail trading companies have enough financial strength to set aside tens of millions in a segregated account with prime banks. Furthermore, retail brokers may or may not get the best quote while dealing with a single prime broker. Moreover, the frequency of requotes, if any, should be minimal, and orders should be quickly filled. Finally, a retail broker needs to constantly allocate capital on technical upgrades. Dealing with a PoP broker would eliminate these issues and a retail broker would be able to concentrate on acquiring customers. To sum it up, a retail company will have the following benefits while dealing with a PoP broker:
Some of the PoP brokers will have more than one prime bank relationship. Thus, a retail Forex broker dealing with them will get a highly competitive, non-latent quotes, negligible requotes (if at all any), and higher percentage of order fills overall, a higher level of order execution quality.
Data feed offered by a PoP broker can be easily connected to many kinds of trading platforms.
Up-to-date technology that will guarantee a stable and secure trading environment.
The demand for prime of prime services is only expected to increase in the years to come as banks are turning more and more stringent when accepting a new broker-client. Retail traders should be aware of this and prefer to deal only with thoseForex brokersthat have stable relationship with solid PoP intermediaries.
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Forex trading bears intrinsic risks of loss. You must understand that Forex trading, while potentially profitable, can make you lose your money. Never trade with the money that you cannot afford to lose! Trading with leverage can wipe your account even faster.
CFDs are leveraged products and as such loses may be more than the initial invested capital. Trading in CFDs carry a high level of risk thus may not be appropriate for all investors.