How To Choose Spread in Forex Brokers
Unlike many other markets that are exchange-driven, the FX market possesses an exclusive feature which multitudes of market makers utilise to entice traders.
Market makers ensure neither regulatory or exchange fees, nor data fees, nor commissions. To new-fangled traders who are just about to make their debut in the business of trading, these offers sound almost irresistible.
Trading without any transaction costs is an obvious advantage. Nonetheless, what initially sounds like a deal to newbie traders might not even be a bargain at all.
We are going to show you how to assess FX broker commission/fee structures and find that one which suits you best.
Forex brokers utilise three forms of commissions. There are brokerages that provide a fixed spread, others provide a variable one, and there are third firms that demand a commission based on a given percentage amount of the spread.
Before we analyse the best choice, let’s delineate a spread.
A spread is defined as the variation between the price a market maker is ready to pay an investor for purchasing a currency (bid price) and the price at which he/she is ready to sell an investor a currency (ask price).
Imagine you are exploring the following quote: “IDRINR – 1.2522-1.2526.” This is a spread of four pips – the difference between the bid price set to 1.2522 and the ask price set to 1.2526. If a trader is dealing with a market maker who is providing a fixed spread of four pips rather than a variable spread, the difference will be fixed, meaning it will always be four pips, irrespective of the market’s volatility.
If a brokerage provides a variable spread, an investor may expect a spread that might be as low as 1 pips or as high as six pips, contingent upon the market volatility level and the currency pair that’s traded.
There are brokers that may also require a minuscule commission, such as three-tenths of a pip. After that, they will pass the order flow, which was received from the trader, on to a huge market maker with whom they have a relationship. In the framework of such an arrangement, the investors may only get a very tight spread to which solely huger traders could otherwise have access.
Various Brokerages, Various Service Levels
Provided that all brokerages are not forged equal, we need to take other factors into account when assessing which brokerage, respectively commission, is the most beneficial for our trading accounts.
The FX market is considered an over-the-counter market. This means that banks, which are the chief market creators, have relations with other banks, as well as price aggregators (in the face of retail online brokers), on the basis of the creditworthiness and capitalisation of each organisation.
In this equation, there are no exchanges or guarantors involved, solely the credit agreement between each of the players. Thus, when we speak of online market makers, your brokerage’s overall effectiveness will hinge on her/his relations with banks, and the magnitude of the volume the brokerage does with them. Typically, those FX players who have a higher trading volume acquire tighter spreads.
If a trader’s broker has a solid relation with several banks and can amass, for instance, price quotes from 11 banks, then the brokerage will be capable of transferring the median ask and bid price to its respected retail clients. Even after marginally broadening the spread to account for revenue, the dealer can provide an investor with a more competitive spread than other competitors whose capitalisation is not that good.
If you are communicating with a brokerage that can guarantee liquidity at eye-catching spreads, then that might be probably what you should seek. However, you may desire to pay a fixed spread if you are aware that you are obtaining at-the-cash executions with each time you trade. Beware of slippages that happen when your trade is NOT carried out on the price which was offered to you initially.
If there is a commission broker, whether one should pay a tiny commission hinges on the other services of the broker.
Imagine an investor’s broker charges a tiny commission, for instance, $2 to $2.50 per 100,000 units traded, but at the same time, she/he provides you with an access to an exclusive software platform, which is superior to the bulk of other online platforms, or grants you access to other cool perks.
If that is the case, paying the tiny commission for these extras might be worth it.
Selecting a Forex Broker
As a trader, next to the type of spreads offered, you are advised to take into consideration the whole package when selecting a broker. Perhaps, some brokerages might offer superb spreads, but their platforms may lack some features their competitor platforms do have. These questions will aid you in choosing:
- Is the firm well capitalised?
- How long has it been functioning on the business arena?
- Who is in charge and what’s his/her experience?
- In terms of order size, what are the firm’s liquidity promises?
- What is the broker’s margin policy?
- How many and which are the banks that the firm has established relations with?
- What is the sort of platform that is offered?
- What is the total monthly volume of transactions?
- What is the broker’s rollover policy should you need to maintain your positions overnight?
- Does the brokerage possess a dealing desk?
- What are you supposed to do if you lose connection with the Internet and you have an open position?
- Does the broker possess multiple order types, including “order sends order” or “order cancels order”?
- Does the firm guarantee to carry out your stop losses at the promised order price?
- Does the broker add spreads to the rollover interest rates?
- Is the brokerage offering all the back-end office functions in real time?
The Bottom Line
Despite that you may be thinking you are hitting the bargain when paying for a variable spread, you might be giving up on other perks.
One thing is sure, though: Traders always pay the spread, and brokers always gain it.
To secure the best possible deal, opt for a trustworthy brokerage that is well capitalised and has solid relations with the hugest FX banks. Look over the spreads of the most popular currencies.
Quite frequently, they will be as low as 1 or 1.5 pips. If that is the situation, a fixed spread might be more expensive than a variable one. There are brokerages that even provide you with a choice of either a variable or a fixed spread. The bottom line is the following: opt for a market maker that is dependable and who may offer your preferred liquidity.