Fixed spreads don’t have to be a bad thing
One of the subjects that often come up for discussion with some potential clients is “The Spread”. The spread is the difference between the Buy & Sell price. It’s the way that non-dealing-desk brokers make their money.
Spreads and costs need to be put into perspective within the bigger investment picture.
Let’s think a little, 10 years ago an investor would have to have a personal broker that would take a percentage of your hard earned cash, combined with a large deposit, usually in excess of $50,000. Transactions would be done via telephone in a three way conversation and trades would take anything from 3-4 seconds to execute, sometimes longer.
With the advent of online brokers and the widespread availability of the internet, investing and monitoring portfolios is now possible anytime, anyplace, in milliseconds.
No personal broker is required, minimum investment is at the discretion of the investor and more importantly, deals are executed in fractions of a second.
A fixed spread is when the difference between BID/ASK prices is a fixed number of pips depending on what product you are investing in. The advantage of fixed spreads is that you know EXACTLY how much you are going to pay for the investment transaction. The cost is a simple calculation of (Invested amount & leverage used to produce a PIP value * the number of PIPs). In fact most platforms will show you exactly how much that is, without you having to make the calculation in your head.
On the exchange spreads are always dynamic because they are subject to the fluctuations between BID/ASK demand. Some brokers lure potential clients with variable spreads, advertising that their spreads can go “as low as 0”.
Variable Spreads are calculated on a “round turn” deal, meaning that the investment must be opened & closed to complete the transaction. At the point of closing, your spread is calculated depending on the available BID/ASK price at that instant. When you close the trade, spreads can be as low as they were at your entry point however, they also have the ability to “slip” (Slippage) and provide far larger spreads than expected. So in effect, you can’t factor in the price of the spread until the deal ends.
Even though fixed spreads can sometimes seem higher than variable spreads, they can protect you from market unpredictability, often at the broker’s expense. Some Brokers, offer fixed spreads on all instruments, so you know that you will always be able to invest in USD/JPY with a 2 pip spread, no matter what the market conditions happen to be.Although trading in abnormal conditions can result in “Slippage” or an inability to execute the trade.