#Collaborative post
In the UK, forex trading is done electronically over various platforms that connect buyers and sellers on foreign exchange markets.
However, not all these connections are made between two individuals on a computer.
Many of the most popular brokers also provide so-called “synthetic cross pairs”, which can be used by investors who trade here.
Synthetic cross pairs
The synthetic cross pairs work as follows:
If you have an account with a non-UK forex broker and want to trade with a company based in the UK, you will often find that you can’t make the trade with your chosen broker directly.
It might be because they do not have regulatory permission from the FCA or perhaps because of a general lack of direct communication between them –it is often hard to know the precise reasons.
However, most brokers will offer you a solution in the form of synthetic cross pairs, which are simulated trades between your broker and another broker sitting on the other side of the market.
Artificial trade
The process works by creating an artificial trade that replicates the effect of trading with your chosen broker, even if their platform cannot connect directly with yours for regulatory or some other reason.
It would help if you researched beyond this article before using it since there can be significant differences between brokers’ platforms and these types of trades – so at all times, ensure you choose a forex broker who best suits your needs.
Know trading in different countries
The same principle applies when trading within different geographic regions as well.
For example, if you have an account-based in the UK but want to trade with a broker from another country, you may find that synthetics will be offered as a solution.
The two countries involved might not have regulatory permission to communicate directly.
In this case, synthetic cross pairs effectively allow you to make markets in countries where your chosen broker does not have a direct presence –something which can be crucial.
For example, a company’s business plan involves trading in many locations or regions.
STP
Using synthetic cross pairs is often called forex “straight-through processing” (STP).
Everyone should note that only brokers who are active members of at least one of the leading international forex associations can offer STP services accurate cross-pairs as part of their services.
The majority of the more reputable forex brokers are active members of one or both of these associations, so it is not something that should pose a real problem for UK investors -but it is essential to be aware of any potential problems before investing.
It is also worth noting that some traders may prefer only to use brokers who are not members of these associations due to concerns over competition and transparency.
However, their choice will have more significance for those looking at longer-term investments where there might be an opportunity for more significant gains by building trust with a broker and their platform.
However, for UK-based traders, synthetic cross pairs offer an easy way to make trades in other countries and regions even if they do not have direct access through their chosen broker.
Research the pitfalls
When trading forex, whether for speculative or hedging purposes within the UK, it is essential to understand what synthetic cross-pairing is to know the pitfalls and trade accordingly.
If you have ever traded any other pair, e.g. EUR/USD, then you will be familiar with all pairs being quoted in terms of another currency.
It means that when trading one pair, you always have to convert your money into another currency.
For example, if you wanted to sell one lot of GBP USD (synthetic cross), ‘1 lot’ would be 100K USD (because 1 GBP = 0.623056USD at the time of writing) when buying this exact pair, ‘1 lot’ will be 100K GBP.
It is because you are buying 100K GBP when buying GBP/USD but selling them to get the USD in your account.
Link to forex trading for more information.
