Chapter 5 - The fallacy of best execution

Market makers are more concerned with making deals than making trades

For any type of trading, best execution comprises three essential factors:

1. the best price (least displacement from the quote)

2. the fastest execution (to capture the moment of opportunity—without the delay of dealer intervention)

3. the fastest settlement (for traders, to maintain the flow of capital; for market makers, to avoid operational and interest-rate risk)

Don't look for any of these in fx trading today, because market makers discriminate among traders and how trades are quoted and executed. Maybe your market maker has got your number: because of your trading style, because you trade in odd or small lots, or because—in the eyes of the market maker—you're on the wrong side of a given trade.

Ask your market maker why identical trades have different spreads and close at different prices. When you're told that “spreads don't matter,” be prepared to dig a little deeper. And beware the guaranteed spread. Compare your quote to other spreads for your intended trade that aren't quite so fat. Realize that a guarantee is never free: it's a window of inflated cost to allow for extra margin—but not necessarily yours.

Artificially triggering stops to close out a position is the worst form of discrimination. It kills a trade at the will of the market maker and defuses what could have been a successful strategy.
You'll never know.

The right to equal treatment

Whatever the size of your position, whether you're long or short, no matter where you set your stop-loss, and regardless of your trading history—every trader should get the same spread and the same price. Instantaneously. No excuses.

Spreads matter. They're the part of the transaction where you can exercise the greatest control: by choosing a market maker with tight spreads up front, who doesn't discriminate, and whose execution—trade after trade—keeps your total cost in line with your real profit.

You have the right to understand your total cost of ownership. Inflated spreads will hide this from you, and your market maker will always defend the price you got as best execution. Instead of just accepting it, figure out for yourself what's really best.

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