Slippage is the difference between the expected price of trade and the price the trade is actually executed. Slippage can occur for a number of different reasons and can work for and against a trader. Asymmetric price slippage is different in the sense that traders are prevented from taking advantage of price improvements, with slippage only occurring when it works against the trader. Asymmetric price slippage has received quite a bit of attention over the past couple of years, with regulators coming task with a number of FX brokerages who had been engaging in practices which prevented customers taking advantage of slippage that occurred in the clients favour.
The both example features two examples where slippage occurs. In the first fictional scenario slippage works against the trader meaning the trader is $20 worse off than he would have been had no slippage occurred. This may simply be down to market volatility or lack of liquidity which made it impossible for his order to be fulfilled at the expected price. In the second example, slippage results in a $20 price improvement but the difference isn’t passed onto the trader, which means he doesn’t benefit from the positive slippage. Asymmetric slippage sees traders lose out while brokerages benefit.
The Virtual Dealer Plugin has achieved a degree of infamy among retail FX traders, as the plugin allowed brokerages to delay customers orders from anywhere to 1 to 5 seconds. The plugin also had settings to allow brokerages to limit or stop traders benefiting from slippage which occurred in their favour. There are many discussions of the plugin, but there is little knowledge of how widespread usage of the plugin is. It should be noted that the plugin is not the only way in which brokerage firms are able to profit off of asymmetric slippage and there have been a number of cases which did not involve the infamous plugin at all.
Cases of Asymmetric Slippage
Over the past few years there have been a number of high profile cases where brokerages have been placed in the spotlight regarding asymmetric price slippage with regulators taking action against a number of major FX firms. In particular there have been a number of cases involving high profile US brokers who had failed to pass on instances of positive slippage to their clients. In 2011, the NFA levied a $2.0 million sanction against FXCM for retaining gains derived from asymmetrical positive price slippage. More recently in July 2012, US Forex broker FXDD was targeted by the NFA regarding asymmetric slippage. The NFA has come out with formal statements setting out its view that slippage must be uniform and symmetrical.
It is not only in the United States, where brokerages have been in the headlines regarding asymmetric slippage with European regulators taking action against firms which have been thought to in breach of regulation. In the third quarter of 2013, FXCM announced a loss which was due to the creation of $15.0 million reserve fund to pay potential FCA regulatory fines in regards to asymmetric execution slippage which occurred prior to August 2010. However since August 2010, FXCM has upgraded its trading “to help ensure that clients benefit from positive slippage on all market, limit and limit entry orders. The policy was further enhanced in December 2010 to address all order types, including stop and margin call orders, through FXCM’s No Dealing Desk (“NDD”) forex execution model. At this stage the enforcement investigation has not yet been resolved and there has been no finding of wrong doing. FXCM is one of the only FX brokers to give clients price improvements.”
There is no real data to clarify just how prevalent asymmetric slippage practices actually are, but firms which fail to pass on improvements in execution prices are potentially in breach of both US and European regulation. In the past few years regulators have been more vigilant about asymmetric slippage and firms regulated in tough jurisdictions will be unlikely to risk being on the receiving end of action by the countries regulators. Brokerages that aren’t regulated in jurisdictions with a tough regulatory regime may be more inclined to not pass on positive slippage to traders.