What is Prime Of Prime Brokerage in Forex and What is their business model?... A prime brokerage is a special group of services that many brokeragesgive to special clients. The services provided under prime brokering aresecurities lending, leveraged trade executions, and cash management, among other things.
Prime brokerage services are provided by most of the large brokers, such as Goldman Sachs, Paine Webber, and Morgan Stanley Dean Witter
There is significant value in having direct access to quality execution and sufficient liquidity. Prime brokers offer tighter spreads lower rejection rates and improved execution over retail forex brokers.
However prime brokerages typically do not permit individual accounts and so one option for Professional Forex Traders who wish to be able to trade under the best conditions would be to establishing a proprietary trading corporation.
It is an easy solution to implement which also provides personal protection against margin and trading liabilities.
Four Major Benefits
By accessing wholesale liquidity through a Prime Broker Professional Forex Traders can leverage the following four major benefits:
Tighter Institutional Spreads
As a neutral liquidity source Prime Brokers have an incentive to facilitate as much trading activity as possible from their customers as possible. They are compensated by a prime brokerage fee which is ususally charged on a per-million basis each month.
Because they typically work only with institutions they do not have the huge overhead of employees and fixed costs that retail brokerages must bear in order to service a large number of clients. As a result they are able to offer institutional spreads to their customers – as much as 2-3 pips tighter than retail accounts – and earn a respectable profit because of their lower cost-basis.
True Market Depth
Access to multiple liquidity providers is one of the biggest advantages of trading via a Prime Broker. This will allow you to place larger orders and trade more efficiently during periods of low liquidity because there are multiple liquidity providers effectively mutualizing the risk of these transactions – each of whom have a large pool of internal transactions to match your trades against.
Again having access to multiple liquidity providers can only improve execution rates especially during more volatile markets or fundamental news announcements when the risk for any single trading counterparty would substantially increase.
Retail forex brokerages that do not have sufficient access to liquidity during those times may choose to significantly widen their spreads or even requote and/or reject orders from their customers that are on the right side of the market during those times.
This is because if the retail brokerage were to execute his customer’s order at the requested price without being able to immediately offset that risk in the interbank market at a better price it would mean a loss for the broker.
Prime Brokerages typically have liquidity relationships that can scale with the growing volumes of a successful trader and the trader would enjoy superior execution at all times of the day as a result.
Lower Transaction Costs
Lower spreads are only part of the equation here. It is important to consider the unexpected costs of trading particularly if your access to forex liquidity is currently limited to one retail forex brokerage.
The cost savings from receiving superior order execution at the best prices available can be as must as 50% of overall transactions cost – which means that Professional Forex Traders can dramatically improve their returns simply by choosing the right liquidity source.