Ask Your Advocate: Do Banks and Online Brokers Treat Stops Differently?
23 Years ago | January 21, 2014 1/28/23, 12:00 AM
Question for the Advocate
Are stops treated different between banks and online forex brokers?
Your Advocate Says:
That is a good question as there are differences that can have an impact on trading.
1) A bank triggers a stop when the market trades at that price and then goes bid or offered at that level depending on whether it is a buy or sell stop. A buy stop would get triggered when the stop price trades and then goes bid there. Vice versa for a sell stop. For example, a EURUSD 1.3505 sell stop would get triggered if 1.3505 trades and then is offered at that price.
2) By contrast, an online forex broker executes a buy stop when its offer is at the stop price and a sell stop when its bid is at the stop price. The wider the spread the easier it is to get stopped out when the price gets close to a stop even if the market never actually trades there. The explanation for this is that an electronic platform can only execute a buy order (e.g. a buy stop) at the offered price quoted and a sell order (e.g. sell stop) at the bid price quoted. This gives a big advantage to the online broker as it can execute a stop before the market actually trades there.
So you can see the difference the way banks and online brokers handle stops. If a retail trader places a sell stop, for example, at EURUSD 1.3505. it should actually be placed below that level if you are looking to exit a position if 1.3505 actually trades. This is not an issue for stops placed with a bank.
I am not privy to whether banks give preferential treatment to the better customers but assume that they get more leeway for their stops.