Why the requote? why the slippage?
I have seen chit chat about how brokers handle news releases. Traders says it is wrong for a broker to withdraw their orders or increase the spreads, and/or requite orders more than normal. These events happen for specific reasons that have absolutely NOTHING to do with the broker tying to cheat the trader out of money. Let me explain why:
In the minutes that lead up to a news event, some traders will enter a trade with the expectation that the news event will cause the trade to go a certain way. The banks will remove their orders so they wont get whipped into or out of trades. Traders that use technical analysis will remove orders as they tend to avoid news events. Hedge Funds and other big players are already into the market and are waiting for the news tow “settle” so they can make their decisions after the fact.
As you know, to keep spreads tight we need liquidity.
Banks provide liquidity to the ECN’s and retail brokers. However due to the lack of liquidity, the bank spread widens and so down the chain it travels. ECN’s are passing the banks offers on. And so spread widen up to their customers. The retail brokers have just opened huge hole in their risk since they cant hedge their net exposure (this is when they shut down or requite the most)
With no trader in the market in the second following the news there are only 2 prices the one just before the news, and the price that is hit seconds after the event, sometimes 30-50 pips (or more) away from the pre news price. This is basically a price “gap”
Back with another steamy pile soon!
Good post.. I think a lot of retail traders don’t fully understand the fact that ECN brokers match the other side of the position with somebody else. If the BOE hike rates unexpectedly, there isn’t going to be anyone willing to take a take the opposite side of your long gbp/usd.. they would be mad too