SpreadWhat Is Spread?


    • Ask and Bid price

    To make a trade on a currency pair, each broker also known as market maker, offers two types of price: Ask and Bid price. These prices are the price the market maker is willing to sell the security, and the price which he is willing to buy the security.

    The difference between these two prices is the so-called spreadthat represents the implicit cost of our trade operation, as well as the market makers profit for adding to liquidity and bearing the risks of holding a security.

    Spreads varies from different securities to another, as well as different account types offered by the brokers. Highly volatile securities like exotic pairs and cryptocurrencies usually have wider spreads compared to other pairs/securities. Some brokers provide traders the option of choosing between fixed spreads or constantly changing spreads based on market conditions.

    From a traders point of view, when we place a BUY order, we are offered the ASK price which represents the highest among the two. At the end of the trade, the broker will assign the bid price (lower price), so the difference between the two represents the spread we consider as a transaction cost.

    Also when a SELLorder is placed, we are offered theBID price that represents the lower of the two. At the end of this trade, the broker will give us the ask price (higher price), even in this case the difference between the two represents the spread which we incurred as a transaction cost.

    At volatile periods such as economic fundamental announcements, natural occurrences, often leads to a sudden widening in the spread of a security.

     

    • example

    Let's make an example in order to better understand the mechanism: we decide to make an order on EUR/USD and quoted an Ask price of 1.10135, and a Bid price of 1.10120. The spread in this case is 0.00015 i.e. 1.5 pip

    Assuming that our forecast is to BUY, we are therefore offered an Ask price of 1.10135.  After a few seconds we realize that we are not convinced of our forecast, and decide to close our position immediately. In this short time, prices remained totally flat and therefore our broker puts us at the Bid price of 1.10120. Even if the market did not move the prices, we sustained a loss of 1.5 pips representing the spread cost applied by our broker.

Interviews

  • the Analyst's answer

    Jean Grossett - Financial analyst

    As a final consideration from a traders point of view, the spread is simplya cost of doing business.

    When going shoping for a broker/market maker company, it is important to enquire on the types of accounts they have, and how they handle spreads on these accounts. Most brokers provide live chat sessions for their customers, and general inquiries at no charge, so always make sure to make use of this service.

    A deeper approach towards getting information on a broker spreads is by deploying a well written script either meta quotes language 4 or 5 (MQL4 or MQL5) that logs the spread per tick to a text or comma separated file or any programming language that is compatible with your broker e.g Python programming language. This should be done on both demos and live accounts, before even making a deposit.

    An Advice …It is important to carry your personal research and do your due diligence, through reviews on different online forums, in order to avoid scam when shoping for a broker. Ideas on writing spread calculation/logging scripts can be gotten from mql4.com.

Members Comments

  1. Profile photo gravatar of Murray Hettinger
    Murray Hettinger (tdouglas)
    says:

    Spread is the difference between bid price and ask price. When there is more liquidity in the market, spread is going to be small but spread will be more if there is less liquidity in the market. In currency markets, there is less liquidity in Asian session, so the spread on currency pairs is high as compared to European session and New York session, which have high liquidity because there are lot of buyers and sellers in the market during these sessions. Also, spread varies from broker to broker. Some brokers offer ECN account which have lowest spread as there is no markup included in spread. But, instead of charging their commission in spread they have a fix fee depending upon the lot size used.

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