Commissions and fees

Commissions and fees

Determining the spread

Spread (translated from English spread - "total difference") - a value that characterizes the difference between the best prices for buying ("bid") and selling ("ask") currency in a particular period.

 

The essence of the concept

The size of the minimum spread is determined by the market maker (literally “the one who makes the market”). This value increases along the way to the last trader, since it acts as earnings for brokers in the form of a commission on transactions.

The size of the spread is an indicator of the market liquidity, which is inversely related to it, that is, if the spread increases, the liquidity, accordingly, decreases. In this regard, when trading currency pairs, the spread value has a low value.

To regulate market liquidity on stock exchanges, spread limits are used: reaching the maximum value causes an immediate stop of trading.
Opening a trade in Forex entails an automatic loss to the trader in the amount of the spread.

Let's say if a client opens a long position, the volume of which is equal to two lots in the EUR / USD currency pair, and the quote is 1.0931 / 1.0933, therefore, the amount of the initial loss is 40 USD (the value for one lot is 20).

For this deal to cross the breakeven point, the quote must change in the direction of the deal by at least two points. Naturally, a shift of more than two points is required to make a profit.

For conscientious brokers, the spread acts as the main source of profit.

 

Types of spreads

In the Forex market, there are two forms of spread:
1. Fixed spread, the value of which does not change under the influence of changes in the supply and demand of currency, changes in the trend and other factors. Accordingly, this form is more reliable in terms of forecasting.
2. Floating spread is the most well-known form that changes in accordance with existing market conditions. The broker, however, allocates only the lower threshold of the range of its changes.

For the most part, this form of spread in a normal market for the leading currency pairs ranges from two to five points, but can grow to fifty and beyond. Such sharp fluctuations make it risky to trade using automated strategies and accounts for this form of spread, since strategies that work on the machine are not able to quickly take into account spread fluctuations.

 

Factors affecting the size of the spread:

1. Currency liquidity
In relation to the most common currency pairs in the market, the spread fluctuates within ten points.
2. Volume of the transaction
Large transactions entail increased risk, and small ones entail unnecessary costs. Such transactions are quoted with a high level of spread.
3. Market conditions
Volatility (the level of price change in the market) has a direct impact on the spread: if Forex is actively trading on major currency pairs, then the spread increases. This is usually facilitated by unexpected but important news on the market, as well as a decrease in liquidity, which is especially typical for the night time and holidays.
4. Cooperation with a dealing center, which gives an advantage to new traders in the form of a low spread.

 

Spread refund

Spread refund or rebate (translated from English as "rebate" - discount) is a special type of discount provided after the purchase, regardless of the results of the transaction. It aims to stimulate buying and establish a long-term relationship between buyer and seller in the market.
Many Forex brokers have similar services. In addition, there are third-party rebate services.
 

READY TO TRADE ON THE STOCK MARKET?