Prime brokerage involves larger financial institutions that conduct transactions with hedge funds and with other similarly larger institutions. Most seasoned Forex traders now prefer employing the services of Prime brokers due to the promise of direct access to multiple liquidity providers coupled with the highest quality in execution. It is however important to note that prime brokerages do not allow clients to have individual accounts, leaving traders with only one option; the creation of a proprietary trading conglomerate. Such a solution is beneficial to a trader who is after the best conditions that protect those trading in margin liabilities. The following are benefits professional Forex traders can leverage from the wholesale liquidity access offered by prime Forex brokers:
Lower Transactional Cost
With trader access to Forex liquidity being limited to only one retail Forex brokerage firm, random unexpected costs are not a surprise. This can happen to a trader who had earlier been promised lower spreads. However, spreads are not the only factor to be considered when trading. Prime brokerage accounts offer advanced order execution that is usually offered at the finest prices available. This simply means that can improve their returns, especially if they choose the best liquidity source for their transactions.
Offer Of Institutional Spreads That Are Tighter
Prime brokers only typically deal with institutions and for this reason they do not have a fixed number of employees. They also do not have costs that are fixed, which they have to cater for again in order to service a huge number of customers. Additionally, Prime brokers have an inducement to ensure there is as much trading as there possibly can be from their clients considering they are a liquidity source that is neutral. This allows them to offer institutional spreads to their customers with spreads 2-3 PIPs tighter than those offered by retail accounts. This is a win-win situation because the tighter (lower cost-basis) spreads that the clients enjoy also benefit the Prime brokers in terms of higher profits.
A Profound Market Depth Experience
With the use of a Prime broker as an intermediary, a trader is assured of access to a number of liquidity providers found in the Foreign Exchange Market. Through access to multiple liquidity providers, a trader is able to place large volume orders and trade with ease. Even when there is low liquidity there are always other liquidity providers readily available. This greatly reduces the risk of making losses that the transactions might encounter during trading.
Better Execution Of Orders
The Foreign Exchange Market is better known for its volatility, which directly leads to fluctuation of currencies. Prime brokers enjoy access to a number of liquidity providers. This means that this improves the execution rates especially when elemental news announcements are made or when the market becomes volatile.
During such times, retail Forex brokers with no sufficient access to liquidity providers are usually forced to widen their spreads, re-quote or in some instances reject orders of clients that are on the right side of the Foreign Exchange Market. This is because any execution of orders on the client’s requested price, without offsetting the risk to the interbank market at a better price, would portend massive losses for the broker.
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