A Partner Glossary – Demystifying the Trading Narrative

The worlds of trading and investing are awash with jargon, slang and terms that have multiple meanings. There’s obviously a need for those involved in this space to try and act in an informed manner, but what that means is all too often these shorthand phrases are tossed about liberally - with few people understanding what they actually mean. At Scope Markets, we want to do our bit to help you demystify the trading narrative. That’s why we asked Fraser Nelson , our Global Head of Business Development, to explain just a few of the terms commonly used – and all too frequently misunderstood.

Flow – When a client places an order, a whole series of processes take place invisibly in the background to execute that trade. However the risk associated with the trade needs to be managed appropriately, so the order which is passed from the client’s broker to a liquidity provider is known as flow.

Liquidity – This is essentially the other side of the trade. To allow an order to be executed, we need to have someone on the other side willing to act as the counterparty. They are said to be the liquidity provider, and they play a key role not only in ensuring orders can be filled - but also doing it quickly and at a fair price.

Non-Bank Liquidity Provider (NBLP) – A reduction in the appetite for major banks to offer liquidity to a wide range of counterparties has resulted in some structural changes when it comes to the entities providing liquidity. Traditional providers were typically high-profile multinational banks, but technological innovation and a redeployment of capital means a generation of new players are in this space. It’s important to note that an NBLP will have the ability to make their own prices, not just requote what is available from the so-called tier one liquidity pool.

Rebate – This is the payment you as an introducing broker will receive from the orders placed by your client. A number of factors will impact how this is paid.

Commission – Typically a fixed fee that is applied to a trade to fund the intermediary’s operations.

Hedge - The process of using an asset to manage risk. It is typically a diversification tool, so traders may look to hedge their risk on one asset by taking up a second position that in combination should mitigate any major price shocks. For example, if a client is buying GBP/USD and they wish to hedge the trade, they may place a sell order on EUR/USD as the two are negatively correlated.

Resting order – This is an order which a client places into the market that the broker will attempt to execute if certain conditions are met. A stop loss – where a position is closed out if a certain price threshold is reached – is a classic example of a resting order. They can also be known as conditional orders.

Market order – The opposite of a resting order, a market order will be placed into the market as soon as a client makes the instruction.??

Ring-fence –This is a very important point. A broker that ringfences client money is making a commitment not to use that capital for anything other than the client’s own trades. This is a core aspect of working with any regulated entity and means that the trading funds deposited can’t be used to fund the broker’s day-to-day operations.?

Cross-margin – This is a useful concept, where if a client has multiple positions open at any one time, the broker can assess the liability across the whole portfolio to determine if there is sufficient trading margin on the account. This is a key benefit in encouraging clients to trade with a single broker, rather than spreading their investment strategy across multiple providers.

Part Two of this glossary will be published early in the New Year so be sure to subscribe to the Scope Partners newsletter https://www.dhirubhai.net/newsletters/scope-partners-7232359893842726912/ .

At Scope Markets, we take great pride in ensuring that we are open, honest and transparent with our partners. We may use jargon at times, but we’ll never hide behind it and are always ready to help coach Introducing Brokers through the lexicon of terms that exist. To find out more, contact the Scope Markets team.