Introduction to Execution Policies
A comprehensive introduction to forex execution policies, what they are, why they matter, and what you should look for as a trader.
## What is an Execution Policy? An <HighlightText variant="yellow">execution policy</HighlightText> is a formal document that describes how a forex broker handles, routes, and executes client orders. Think of it as the rulebook that governs what happens from the moment you click "buy" or "sell" to when your order is filled. For retail forex traders, understanding execution policies is critical because they reveal: - How your orders are routed to liquidity providers - What conflicts of interest may exist - How the broker defines "best execution" - What happens during periods of high volatility or low liquidity <MarginNote>Execution policies are often found in the "Legal" or "Documents" section of a broker's website.</MarginNote> ## Why Execution Policies Matter Unlike regulated exchanges where execution is standardized, forex is an over-the-counter (OTC) market. This means each broker operates differently, and your trading experience can vary significantly based on their execution model. ### Key Differences Between Brokers Different execution models create fundamentally different trading environments: 1. **Market Maker Model** - The broker takes the other side of your trade 2. **ECN/STP Model** - Orders are routed to external liquidity providers 3. **Hybrid Model** - Combination of the above based on order size or client type Each model has trade-offs in terms of spreads, execution speed, slippage, and potential conflicts of interest. ## What to Look For in an Execution Policy When reviewing an execution policy, pay attention to these critical sections: ### Best Execution Obligation Does the broker commit to best execution? How do they define it? What factors do they consider (price, speed, likelihood of execution)? <HighlightText variant="blue">Best execution</HighlightText> doesn't necessarily mean the best price—it's a balance of multiple factors. ### Order Routing Discretion Who decides where your orders go? Does the broker have full discretion, or do they follow specific routing rules? ### Conflict of Interest Disclosures Does the broker benefit when you lose? Do they receive payments from liquidity providers? These conflicts should be clearly disclosed. ### Slippage and Requotes What happens during volatile markets? When might you experience slippage or requotes? ## Common Terms You'll Encounter Here are terms that appear frequently in execution policies: - **Liquidity Provider (LP)** - Banks or institutions that provide tradable prices - **Aggregation** - Combining quotes from multiple LPs to find the best price - **Last Look** - When an LP can reject your order after seeing it (controversial practice) - **Latency** - Time delay between order placement and execution - **Fill Rate** - Percentage of orders successfully executed without rejection ## Red Flags to Watch For Be cautious if an execution policy: - Uses vague language without specific commitments - Gives the broker unlimited discretion without transparency - Lacks disclosure of conflicts of interest - Doesn't explain what happens during abnormal market conditions - Is difficult to find or buried in fine print ## Next Steps Understanding execution policies is just the beginning. To dive deeper: 1. Read our clause-by-clause analysis of common policy language 2. Review execution policy templates to see examples 3. Use our checklists to evaluate your broker's policy 4. Check the annotated policy reader to see a real example <HighlightText variant="pink">Remember:</HighlightText> An execution policy is a living document. Brokers can update their policies, so review them periodically and watch for material changes.