What is Prime of Prime (PoP)?
Prime of Prime, or PoP, is a company that provides a retail broker (often forex brokers) with access to the pool of trade liquidity of the largest banks. These large banks are known as Tier 1 banks and not just anyone can trade directly with them.
Instead, the PoP has access to these large banks and sets up the access for the retail broker, which can connect its smaller retail customer orders with the larger orders from the tier one bank.
- A Prime of Prime (PoP) broker is one who has an account at a Tier 1 bank and allows retail brokers to trade through that account so that the retail broker can access the liquidity of the Tier 1 bank.
- Negotiating directly with a Tier 1 bank and accessing its liquidity is difficult for individuals and small businesses, so the PoP bridges the gap and provides access to the smallest player.
- In order to attract business, PoP brokerages and their associated retail brokers typically offer higher leverage and smaller trade sizes than a main broker.
Understanding Prime of Prime
Top-tier banks tend to be risk averse and therefore demand strict financial protocols and risk management from their clients. A retail broker may not meet these rigid standards and therefore may not be able to deal directly with the top-tier bank. The PoP is compliant with the standards, is a client or partner of the tier one banks and allows the retail broker to trade through them with the tier one bank.
Since the PoP already meets the standards that large banks seek, the retail broker using the PoP will generally offer greater leverage to their traders and offer smaller trade sizes than would be available if they were trading directly with a prime bank. level. They do this to attract business.
One of the reasons why top-tier banks and major brokers don’t provide the services that PoPs provide is that there is a smaller profit margin on smaller trades that typically come from a retail customer and their broker. Also, their systems often don’t support a cost-effective way to complete smaller operations. PoP brokerages are also equipped to deal with increasing regulatory requirements for highly leveraged trading.
Prime of Prime Brokers Ranking
PoPs are considered Tier 2 brokerage firms. Tier 1 is the brokerage arm of large banks that allows merchants and institutional clients to trade with the bank. Level 2, or PoP, can best be described as a brokerage company that has an account with the level one brokerage company and allows its clients to trade with them. Basically, they are narrowing the gap between small retail investors and large first-tier companies.
However, most PoPs will not deal directly with people; retail brokers do. The retail broker handles individual clients and tries to attract more business.
Prime of Prime Brokers in action
Customers will use a PoP service for various reasons. First of all, it provides access to more liquidity, which is important for traders. Second, PoP gives merchants access to products that standard major brokerage accounts don’t offer, such as non-deliverable forward contracts (NDFs).
The PoP structure came under scrutiny in January 2015, when the Swiss National Bank (SNB) eliminated its three-year peg of 1.20 Swiss francs per euro. As a result, the euro and Swiss franc (EUR / CHF) currency pair fell from 1.20 to an intraday low of 0.85, a drop of approximately 41%. Many of these clients were leveraged in their positions; Considering that the pair fell 41% after the announcement, this resulted in significant losses for many clients.
In this event, PoPs increased the amount of funds required in their clients’ accounts for capital requirements, along with the application of other risk management protocols.
Prime of Prime Broker Example
Retail forex brokers are largely PoP in the sense that when they start out they are too small to trade directly with the big banks and access their liquidity. For this reason, they will look for a PoP broker that links them to the big banks.
By linking to large banks, the retail broker can get live price quotes from major banks, creating the quotes that their retail clients can negotiate and interact with. This would not be possible if the broker did not link up with the top tier companies.
The retail broker can increase the margin it receives from top-tier banks. For example, the gross Tier 1 spread on EUR / USD might be 1.12565 times 1.12568, but the rate that clients see is 1.12563 times 1.12570. This is one of the ways forex brokers make money. Other ways include charging a commission for each trade.
Generally, the more PoP accounts or links to big banks a retail broker can get, the better. The liquidity of five large banks is much better than the liquidity of just one. The more Tier 1 banks providing quotes and volume to the retail broker, the lower the retail broker spreads will be, all other things being equal. This is why forex brokers advertise how much liquidity they have access to and which big banks are providing it.