Prime of Prime (PoP)

What Is Prime of Prime (PoP)?

Prime of Prime, or PoP, is a firm that gives a retail broker (frequently forex brokers) with access to the trading liquidity pool of the bigger banks. These big banks are alluded to as tier 1 banks, and not just anybody can trade straightforwardly with them.

Figuring out Prime of Prime (PoP)

Prime of Prime (PoP) are classified as tier 2 brokerage firms. Tier 1 is the brokerage arm of large banks that allow institutional traders and customers to trade with the bank. Tier 2, or PoP, can best be portrayed as a brokerage firm that has an account with the tier 1 brokerage firm and allows its customers to trade with them.

PoP leverages their access to tier 1 banks to set up access for the retail broker, which can interface their smaller retail client orders with the larger orders of the tier 1 bank. In any case, most PoPs won't deal straightforwardly with individuals — the retail brokers do that. The retail broker handles individual clients and attempts to draw in more business.

Tier 1 banks will more often than not be risk-opposed, and subsequently demand severe financial conventions and risk management from their clients. A retail broker may not satisfy these unbending guidelines and in this way will be unable to trade straightforwardly with the tier 1 bank. PoP satisfies these guidelines, is a client or partner with the tier one banks, and allows the retail broker to trade through them with the tier 1 bank.

Starting from the PoP as of now fulfills the guidelines the big banks are searching for, the retail broker utilizing the PoP will commonly offer higher leverage to its traders, and allow them to place smaller estimated trades than what might be available if trading straightforwardly with a tier 1 bank. They do this principally to draw in business since their retail clients might not have the funds to place the larger transactions that tier 1 banks require. In any case, the bid-ask spreads might be more extensive than what tier 1 banks offer. The fundamental justification for this is that this is one of the primary ways that PoPs bring in money.

One reason that tier 1 banks and prime brokers don't offer the types of assistance that PoPs do is that there is a smaller profit margin in the smaller trades which regularly come from a retail client and their broker. Moreover, their systems frequently don't support a practical method for finishing smaller trades. PoP brokerages are likewise furnished to deal with expanding regulatory requirements for profoundly leveraged trades.

Prime of Prime Brokers in real life

Clients will involve a PoP service for a number of reasons. It, first and foremost, gives access to greater liquidity, which is important for traders. Besides, PoP gives traders access to items that standard prime brokerage accounts don't offer, for example, non-deliverable forwards (NDF).

The PoP structure went under examination in January 2015, when the Swiss National Bank (SNB) eliminated its kid peg of 1.20 Swiss francs per euro. Subsequently, the euro and Swiss Franc currency pair (EUR/CHF) dropped from 1.20 to an intraday low of 0.85, a generally 41% drop. Large numbers of these clients were leveraged in their positions; taking into account the pair dropped 41% after the announcement, this brought about major losses for some clients.

This event saw PoPs lift the amount of funds required in its client's accounts for capital requirements, alongside other risk management conventions being upheld.

PoP Example

Retail forex brokers will generally be clients of PoP. At the point when these substances begin they are too small to deal straightforwardly with the big banks and access their liquidity. Hence, they will search out a PoP broker that will interface them up with the big banks.

By connecting to the big banks, the retail broker can access live price quotes from the major banks which they then, at that point, offer, in the wake of enlarging the spread, to their clients. These retail clients can then trade on these prices. This wouldn't be imaginable in the event that the broker didn't connect up with the tier 1 firms.

The retail broker might mark up the spread that they receive from the tier 1 banks. For instance, the raw tier 1 spread on the EUR/USD might be 1.12565 (bid)/1.12567 (ask), however the rate Pop clients might be is 1.12563/1.12569. The additional 0.00002 on one or the other side of the tier 1 spread generates revenue for the PoP. This is offered to their clients, similar to the retail forex broker, who then add a further markup on to this and offer it to their clients. In this way, the retail client might see an EUR/USD quote of 1.1256/1.12572.

This markup in the spread is one way that PoPs and retail forex brokers bring in their money. Alternate ways incorporate charging a commission on each trade.

Normally, the more PoP accounts or connections to the big banks a retail broker can get, the better. Liquidity from five big banks is far superior to liquidity from only one. The more tier 1 banks giving the retail broker quotes and volume, the lower the retail broker's spreads will be, all else being equivalent. This is the reason forex brokers publicize how much liquidity they approach and which big banks are giving it.

Features

• Trading straightforwardly with a tier 1 bank and accessing its liquidity is challenging for individuals and small firms, so the PoP bridges the gap and furnishes the smaller player with access.
• A Prime of Prime (PoP) broker is one that has an account with a tier 1 bank, and lets retail brokers trade through that account so the retail broker can access the tier one bank's liquidity.
• To draw in business, PoP brokerages and their associated retail brokers normally offer higher leverage and smaller trade sizes than a prime broker.