Liquidity Provider A 1.2998 1.3001
Liquidity Provider B 1.2999 1.3001
Liquidity Provider C 1.3000 1.3002
So when you decide to buy 100,000 units of EUR/USD at 1.3002, your order is sent through your broker and then routed to either Liquidity Provider A or B.
If your order is acknowledged, Liquidity Provider A or B will have a short position of 100,000 units of EUR/USD 1.3001, and you will have a long position of 100,000 units of EUR/USD at 1.3002. Your broker will earn 1 pip in revenue.
I am not sure if the table is related to this example, I can’t add a link yet but its kindergarten/choosing-a-broker/different-types-of-brokers
I don’t understand the math in the second paragraph. I recognize on a 1-pip markup you would short at 1.3001 but on a long wouldn’t you pay 1.3003 It could be a typo so I just wanna make sure.
Side question; “IF it is acknowledged” by using the word “if” there is an indication there might not be an acknowledgement, I want to understand this.
• [U]Here’s the short answer to your question[/U]:
If your broker is applying a 1-pip mark-up to each side (buy and sell) of your trade, then (given the prices in the example), [B]you would SELL (short) at 1.2999.[/B] That’s the best I[/I] BID price offered by the liquidity providers MINUS one pip – the one pip being your broker’s profit.
[B]And you would BUY (long) at 1.3002.[/B] That’s the best I[/I] ASK price offered by the liquidity providers PLUS one pip profit for your broker.
• [U]If you’re still unsure about how those prices are determined, here’s the long answer[/U]:
I think we can clear up the confusion here by incorporating your broker’s quoted prices into this example.
As you probably understand, you do not transact [I]buys[/I] or [I]sells[/I] directly with Liquidity Providers. You transact [I]buys[/I] and [I]sells[/I] with your retail broker, who in this example is an STP broker, meaning that when you buy (from your broker), your broker immediately buys from one of his liquidity providers. These two transactions are not carried out at the same price.
Your broker offers you [I]retail prices,[/I] which are the best currently available wholesale prices (from his liquidity providers) plus a retail mark-up.
The table (which you reproduced from the School lesson above) shows the prices offered, to your broker, by three liquidity providers. These prices are shown as BID and ASK prices (in that order), and represent the prices at which your broker can [I]sell to,[/I] or [I]buy from,[/I] the liquidity provider in question.
Just to be perfectly clear, according to the table, the best prices currently offered to your broker are: 1.3000 BID (from Liquidity Provider C), and 1.3001 ASK (from either A or B). That is, your broker currently can SELL into the interbank market at 1.3000, and/or BUY in the interbank market at 1.3001.
Your broker adds a mark-up (retail broker profit) in either case. So, the prices you see, as a retail customer are: 1.2999 BID (that’s the wholesale bid price minus one pip) and 1.3002 ASK (that’s the wholesale ask price plus one pip).
When you buy at the price currently offered by your broker, you BUY at 1.3002. Immediately, your broker [I]mirrors[/I] your buy upstream (with either A or B); that is, your broker BUYS at 1.3001 (from either A or B). Your broker makes 1 pip in profit on this (opening) leg of your position.
If prices were to remain absolutely unchanged until you decide to exit your position, you would see the same BID and ASK prices you saw at the time of entry: 1.2999 BID / 1.3002 ASK. Let’s say you choose to exit (sell) at 1.2999. At that moment, your broker enters a SELL order at 1.3000 (with Liquidity Provider C), earning another pip in profit on the second (closing) leg of your position.
Altogether, you lost 3 pips on your trade (buying at 1.3002, and selling at 1.2999). Two of the pips you lost went to your broker, who earned one pip on each leg of your trade. The third pip was earned upstream at the interbank level, being essentially split between the two liquidity providers your broker dealt with in handling your trade.
Don’t stumble over that word [I]if.[/I] The School lesson seems simply to be acknowledging that an order is not a transaction [I]until[/I] it is executed by your broker.