Instant and Market Execution

What is the difference in the Instant and Market execution types?

Instant execution – is a type of execution when a client is placing an order and specifies both volume and price; the order should be processed instantly. If the price changes at the moment, a broker cannot change the execution price. But he can reject the execution and reply with a requote, which can be accept or not. This execution type is usually used by Market Maker brokers. Instant Execution is often complemented by fixed spread, which is, as a rule, larger than real market spreads. The use of this execution type by Market Makers is caused by the fact that some trading platforms do not provide possibility to work with the Depth of Market (DOM). Therefore, in case of Market Execution, it would be difficult to explain to customers why the price of executed order is worse than it was when placing the order. It is especially noticeable in case of large volume orders (starting from 30 lots and above).

The reasons for this is that certain bid and ask prices are represented only in certain volumes at the market, and the large volume orders will be filled according to available volumes of prices –Depth of the Market.. It should be noted, however, that nothing prevents brokers to use Market Execution type without Depth of the Market and calculate the price for the customers using their proprietary algorithms.

Besides this, a broker using Instant Execution may have some difficulties with placing trades at large liquidity providers (LP). It is again connected with the Depth of the Market and the fact that almost all of LPs use Market Execution model. The problem is that the liquidity provider, that uses the Market Execution, does not guarantee certain execution price to a broker, while broker, in its turn, is obliged to guarantee it to client. A partial solution for this problem is simulation of Instant Execution in the Market Execution environment with the help of Limit orders. As we know, the Limit order guarantees the execution of a specified volume at the specified price. Thus, by placing a Limit order with a short timeout period, we can guarantee execution by requested price. However, this again cannot solve the problem with large volume orders. If there is not enough volume by requested price in the Depth of the Market (DOM) orders will not be filled, this will in turn increase the number of requotes for broker’s clients and affect the quality of execution.

Market Execution – is a type of execution in which the client places an order and specifies only the volume, the bid/ask price of an asset is generated during the process of execution. The main distinction from Instant Execution is that a broker doesn’t reject client’s request in case of price change, but fills the order with the current price. The final price is composed by taking the required volume by available prices from the Depth of Market. All the major liquidity providers, as well as the majority of A-book brokers (STP / ECN) are working by this principle.

If you still don’t know which system will suit your brokerage better or need help in server settings, you can feel free to contact me or my team. We also provide consulting services if you need comprehensive consultation and help in trading platform configuration.