Markup protection as a safeguard in trade execution
A Forex and CFD broker based in New Zealand and falling under local regulations with a focus on retail and institutional trading. The brokerage uses overseas data centres to ensure low latency and high-speed connections to major liquidity providers while securing deep liquidity and competitive pricing.
Issues and pains affecting the business
Excessive markups were leading to significant discrepancies between the execution price provided by liquidity providers and the final price offered to traders. These discrepancies had a negative impact on traders and could potentially lead to regulatory issues.
In addition to the main issue, the broker was concerned with several other problems:
- High market volatility: During significant economic announcements or geopolitical events, the prices of trading instruments fluctuate rapidly.
- Liquidity provider issues: The LP sometimes had delayed price feeds, incorrect pricing, or limited liquidity.
- Technological glitches: Technical issues in the broker's trading platform or the connectivity between the broker and the liquidity provider have caused incorrect pricing.
- Spread widening by LPs: Liquidity providers might widen their spreads during periods of low liquidity or high volatility to protect themselves from risk.
Details of the project:
milestones and number of people involved
The project’s duration, from the introductory call to the final rollout, took 2 weeks.
During these 14 days, the TFB team, represented by a sales manager, a tech specialist, and a local customer success manager, had several meetings with the broker’s team to fully understand the underlying issues and come up with the most effective solutions.
The TFB team proposed several options for the client to choose from. Once the proposed solutions were approved, the technical development and preparation phase started. After a number of tests, the new solution was rolled out in the test environment and demonstrated to the client. The final solution was implemented in the live environment after a few minor tweaks.
Solution and specific features offered
After careful consideration and a round of approvals with the broker, Tools for Brokers offered a number of solutions for the highlighted issues.
The excessive markup issue was resolved with the implementation of a feature that allows the broker not to apply the execution markup in cases where the price difference before and after the markup will exceed a certain value (MarkupProtectionPercent). This feature is used for markup logic after receiving the execution report from an LP. The value is set using the ConfigEditor in the Gateway Database.
The Trade Processor alerts have also been updated with a new event type, "Markup Protection." This alert notifies users when the markup cancellation logic is triggered, providing transparency and ensuring users are informed of the protective measures in place.
End result
The implementation of the Markup Protection safeguard has had several positive impacts on the broker:
- Enhanced fairness: Traders benefit from more equitable execution prices, reducing the likelihood of facing excessive markups.
- Increased transparency: Logging markup protection events and adding Trade Processor alerts contribute to a more transparent trading environment.
- Client trust: By safeguarding traders against unreasonable markups, the client improves its reputation for client-centric practices, potentially attracting more traders to its platform.
- Regulatory alignment: By aligning its practices with regulatory expectations, the broker reduces the risk of regulatory challenges and demonstrates its commitment to market integrity.
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