Forex Trading Broker
Costs: Fee And Commission Structures
The Forex market, unlike other exchange driven markets, has a unique feature that many market makers use to entice traders to trade: they promise no exchange fees or regulatory fees, no data fees and, best of all, no commissions. In the previous chapter we have already mentioned that this advantage has to be well understood, because when it comes to evaluating costs, it much depends on your trading numbers such as frequency, ratios and other performance related statistics.
Basically, there are three commission structures used by Forex brokers: a fixed spread, a variable spread and/or a commission charge based on a percentage of the spread. Just a quick reminder: spread, usually calculated in pips, is the difference between buying and selling price.
So, which is the best choice?
On the one hand, you may think that the fixed spread is the right choice, because then you know exactly what to expect. On the other hand, you might think you are getting a good deal paying a variable but smaller spread.
First of all, consider that the best deal you can get is choosing a reputable broker who is well capitalized, has strong relationships with the large foreign exchange banks and can provide the liquidity you need to trade well. Second, you need to calculate the impact of all possible fee structures on your trading model to know which one is more favorable to you.
Some Forex brokers don't charge a commission, so the spread is how they make money. The lower the number of pips required per trade by the broker is, the greater the hypothetical profit that the trader makes is. Comparing pip spreads of half dozen brokers will reveal different transaction costs.
In the case of a broker who offers a variable spread, you can expect a spread that will, at times, be as low as 1 pip or as high as 7 pips on the most major pairs, depending on the level of market volatility. While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.
While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.
A lack of liquidity in the markets or very volatile market conditions can force the broker to apply a slippage on the pricing. Slippage, also called "requote", occurs when your trade is executed away from the price you were offered, when you end up paying more pips than the average spread. This is perhaps a cost that you don't want to bear if you are trading very short term or if you trade the news.
Asking your broker how they handle news times and if they have any devise to protect you from experimenting slippage is probably a good idea. You can decide to trade with fixed spreads, even if they are a little higher in average but receive, in exchange, an instant fill of your trades at the desired prices.
Some brokers even offer you the choice of either a fixed spread or a variable one.
Other brokers, like ECN brokers, may also charge a small commission, usually in the order of two-tenths of one pip. Whether you should pay a small commission depends on what else the broker is offering. For example, the broker may pass your orders on to a large market makers conglomerate. You might choose a broker with such an arrangement, if you look for very tight spreads only larger investors can otherwise get.
Nevertheless, the spread with an ECN broker is not fixed, and it always depends on the current market depth. Besides, their platforms may not be so user friendly as retail platforms and they usually lack charting tools. In addition, payment and withdrawal options are less efficient when compared to retail brokers and accounts openings require higher minimum amounts.
But if a broker offers, in exchange of a commission, access to a superior proprietary software platform or some other benefit like a real time news feed, in this case, it may be worth paying the small commission for this additional service.
So what is the bottom line effect of each type of spread or commission on your trading? Given that it much depends on your trading profile, this is a difficult question to answer. There are some factors to take into account when weighing what is most advantageous for your trading and that depends on your trading capabilities and preferences.
An important and not very discussed aspect when considering trading costs are the rollover charges. These are determined by the difference between the interest rate of the country of the base currency and the interest rate of the other country. The greater the interest rate differential between the two currencies, the greater the rollover charge. We will cover these concepts in more detail in the next chapter, but as a matter of broker choice, take into account that not all brokers charge the same rollovers for the same pairs.
However, before you jump in and choose a broker based on the type of commission structure, consider the total broker's package, otherwise you may be sacrificing other benefits. For example, some brokers may offer excellent spreads but their platforms may not have that personal preference feature you need for your trading to work.
The information you gathered up to this point will make you enjoy the following webinar, in which John Jagerson teaches not only about the different spread typologies, but also shares a great amount of useful market knowledge for your broker-dealer research. ... next
" While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change."
Costs: Fee And Commission Structures
The Forex market, unlike other exchange driven markets, has a unique feature that many market makers use to entice traders to trade: they promise no exchange fees or regulatory fees, no data fees and, best of all, no commissions. In the previous chapter we have already mentioned that this advantage has to be well understood, because when it comes to evaluating costs, it much depends on your trading numbers such as frequency, ratios and other performance related statistics.Basically, there are three commission structures used by Forex brokers: a fixed spread, a variable spread and/or a commission charge based on a percentage of the spread. Just a quick reminder: spread, usually calculated in pips, is the difference between buying and selling price.
So, which is the best choice?
On the one hand, you may think that the fixed spread is the right choice, because then you know exactly what to expect. On the other hand, you might think you are getting a good deal paying a variable but smaller spread.
First of all, consider that the best deal you can get is choosing a reputable broker who is well capitalized, has strong relationships with the large foreign exchange banks and can provide the liquidity you need to trade well. Second, you need to calculate the impact of all possible fee structures on your trading model to know which one is more favorable to you.
Some Forex brokers don't charge a commission, so the spread is how they make money. The lower the number of pips required per trade by the broker is, the greater the hypothetical profit that the trader makes is. Comparing pip spreads of half dozen brokers will reveal different transaction costs.
In the case of a broker who offers a variable spread, you can expect a spread that will, at times, be as low as 1 pip or as high as 7 pips on the most major pairs, depending on the level of market volatility. While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.
While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.
A lack of liquidity in the markets or very volatile market conditions can force the broker to apply a slippage on the pricing. Slippage, also called "requote", occurs when your trade is executed away from the price you were offered, when you end up paying more pips than the average spread. This is perhaps a cost that you don't want to bear if you are trading very short term or if you trade the news.
Asking your broker how they handle news times and if they have any devise to protect you from experimenting slippage is probably a good idea. You can decide to trade with fixed spreads, even if they are a little higher in average but receive, in exchange, an instant fill of your trades at the desired prices.
Some brokers even offer you the choice of either a fixed spread or a variable one.
Other brokers, like ECN brokers, may also charge a small commission, usually in the order of two-tenths of one pip. Whether you should pay a small commission depends on what else the broker is offering. For example, the broker may pass your orders on to a large market makers conglomerate. You might choose a broker with such an arrangement, if you look for very tight spreads only larger investors can otherwise get.
Nevertheless, the spread with an ECN broker is not fixed, and it always depends on the current market depth. Besides, their platforms may not be so user friendly as retail platforms and they usually lack charting tools. In addition, payment and withdrawal options are less efficient when compared to retail brokers and accounts openings require higher minimum amounts.
But if a broker offers, in exchange of a commission, access to a superior proprietary software platform or some other benefit like a real time news feed, in this case, it may be worth paying the small commission for this additional service.
So what is the bottom line effect of each type of spread or commission on your trading? Given that it much depends on your trading profile, this is a difficult question to answer. There are some factors to take into account when weighing what is most advantageous for your trading and that depends on your trading capabilities and preferences.
An important and not very discussed aspect when considering trading costs are the rollover charges. These are determined by the difference between the interest rate of the country of the base currency and the interest rate of the other country. The greater the interest rate differential between the two currencies, the greater the rollover charge. We will cover these concepts in more detail in the next chapter, but as a matter of broker choice, take into account that not all brokers charge the same rollovers for the same pairs.
However, before you jump in and choose a broker based on the type of commission structure, consider the total broker's package, otherwise you may be sacrificing other benefits. For example, some brokers may offer excellent spreads but their platforms may not have that personal preference feature you need for your trading to work.
The information you gathered up to this point will make you enjoy the following webinar, in which John Jagerson teaches not only about the different spread typologies, but also shares a great amount of useful market knowledge for your broker-dealer research. ... next
" While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change."