Broker to Trading

There are a number of factors which contribute to the cost of a trade. However the spread is a typical headline figure which is used to indicate the trade cost. This page explores some issues surrounding the spread, as well as other related factors. The lowest spreads tend to be for Forex, especially the most liquid Forex pairs, thus this market is the focus. That is, low cost CFD trading based on spreads, can be seen particularly in Forex.

The spread is the difference between the bid and ask for a market. This difference is one of the ways providers can receive compensation. There is a focus then on spreads as an indication of the relative cost of a trade, however there are other factors which can contribute to the cost of a trade.

Forex spreads can be seen offered at some providers with a low of 0 pips, or at least with lows below 1. This has changed over the years, as spreads have tightened. Spreads are related to liquidity, i.e. demand and the capacity for this demand to met easily. Thus the lowest spreads are typically for the most liquid Forex pairs, that is the majors and especially EUR/USD.

Spreads come in different types. Firstly are variable spreads, which are common, particularly in Forex. These change sometimes rapidly according to factors such as market conditions, including volatility. For example, variable spreads can widen considerably during volatile market conditions, such as a news trade.

Next are fixed spreads, which may be less commonly offered in Forex. Fixed spreads tend not to change, though may still alter in volatile market conditions or after hours, for example. Fixed spreads tend to be higher than equivalent variable spreads. There can be some correlation between the variability of spreads, and whether the order will be filled.

The next factor in spreads is whether they have a commission charge or not. The commission charge is a fixed charge added to the spread (the actual amount is normally related to volume). It is typically associated with providers which cater to those using robots or scalping.

These providers may offer very low variable spreads and even low average spreads. The commission charge needs to be added to the spread's cost however, to gain a better understanding of the cost elements of a trade.

If the commission charge is quoted as per lot per side, then this refers to the cost for each side of the trade, per lot. If it is quoted round trip (or round turn), then this refers to the cost for both sides of the trade. The commission charge provides a way to find spreads which are low and relatively stable, as part of their cost is then a fixed charge, which can make them of interest to traders who use automation or scalp.

To give an example, if the spread of the trade is 0.3 pips per side and there is a commission charge of $3.5 per lot per side then the cost per side of the trade for spread and commission is 0.3 + 0.35 = 0.65 per lot. If the cost per side happens to be at 0 pips for a liquid Forex pair, then this cost is not 0, but is 0.35. In addition to these charges, there may be other charges taken as well, but the bulk will be the spread plus any commission charge.

It could be noted that as part of the cost is fixed, providers with low average spreads plus a commission charge have similarities to fixed spreads providers (as the spread cost goes lower, the fixed component becomes more significant).

Fixed spreads do not normally have a commission charge added. However, fixed spreads providers can differ in that those who offer low variable spreads plus a commission charge tend to be focused on automated trading and scalping with no dealing desk execution.

However fixed spreads providers tend to be dealing desk. This means that they may provide offerings for different types of trading. Fixed spreads providers may also cater to automated trading, however. Also some providers offer a mix of fixed and variable spreads.

What this suggests is that like many factors to do with trading, a low cost tends to be seen in the context of the type of trading utilised by the trader. Those whose strategies depend on low spreads, may find a provider with low average spreads plus a commission charge of interest. Those who trade with less reliance on higher frequency trading, may find their preferences in a provider with tight spreads without a commission charge or low fixed spreads.

The financing charge is another factor. This will not apply to those who trade within market hours. Thus day traders will generally not have to pay this cost, if they stick to market hours. However swing traders, who hold positions on longer time frames, would need to factor in the financing charge. In essence, for day traders, the spread plus any commission is typically the cost. But outside of this, financing becomes more significant, the longer a position is held.

Low cost is dependent on several factors, importantly including trading style. A short-term trader may find the spread and any commission charge more significant, as their trading frequency increases. But a longer-term trader may find the financing cost adding up.

A CFD provider is picked for each of these categories. Firstly, a provider offering low spreads with (and without) a commission charge, and a focus on automated trading and scalping. Secondly a provider offering fixed spreads without a commission charge and thirdly one with tight variable spreads, without (and with) a commission charge.