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What kind of spread works best?

Everyone knows that spread is the difference between the bid and ask prices for currency and is one of the ways traders pay their commissions, trading on Forex or other exchange platforms.

Interestingly, not so long ago, a spread of 70-100 points was considered to be the norm, with only the liquidity growth and the intensification of competition forcing brokerages to take measures to reduce spreads. These days, many brokerages and dealing centers offer traders fixed spreads (so-called static spreads), which are not dependent upon market liquidity. Take note that fixed spreads are not possible in principle on Forex. It’s easy to back up this categorical claim. Market quotes on real currency instruments on change constantly (while bid and ask prices fluctuate completely independently of each other, meaning that supply and demand cannot be equal).   As a result, a single spread holding for any extended time horizon is extremely unlikely.

In order to maintain a constant difference between bid and ask prices for trading instruments, many brokerages and dealing centers adjust the actual market prices and offer the altered prices to their clients. This usually shows up in a stable increase, up to the required size.  With this approach, the trader’s costs increase predictably. Many traders’ strategies hinge up concluding a high number of transactions. Widening a spread in any transaction, even by a small amount, results in an overall increase in the “cost price: of trading operations, which is especially apparent if the total number of transactions runs to the hundreds or thousands per day.

In rare cases of  bigger spreads (which takes place, for example, in anticipation of important economic news) from companies offering a fixed spread, the actual amount of the spread must be reduced to the lower boundary of the given “band”. If traders place orders while the market spreads are bigger, the company bears significant risk on orders placed practically “at a loss”. In order to avoid serious financial losses, many dealing centers often deliberately degrade their execution of client orders during periods of bigger market spreads. All traders have seen the external signs of this approach:  the operational performance of the terminals drops suddenly, communications worsen (or disappear altogether), orders are executed with long delays. Instead of the profit expected from rapid price movements, traders are often hit by losses.

That’s why, as practice shows, fixed spreads are, in practice, not profitable for traders in a “calm” market, since their sizes are significantly worse than their real market equivalents. In a volatile market, static spreads could be helpful, but only in cases where the quality of execution of client orders during periods of strong movements remains high, which is quite a rare phenomenon, with this quality not holding up for very long.  One really needs to bear in mind that periods of real volatility are quite rare on Forex. Therefore, only a few experienced and trained professionals, capable of sensing market movements, are capable of using this situation to their own benefit.

Dynamic spreads reflect actual market information on the size and speed of price changes on trading instruments. Consequently, they are more useful from the point of view of forecasting fluid situations and identifying where trends are going. EXNESS aggregates quotes from major European banks directly from the real market, meaning that all of the spreads are dynamic.  The company’s specialists constantly conduct studies, in order to optimizing the algorithms for working with suppliers of liquidity. New, cutting-edge technologies allow us to achieve impressive results: today, the spreads on the primary currency pairs in EXNESS are significantly lower than those offered by our competitors.   In April 2012, the minimum and average spreads on the primary currency pairs were calculated for the month, based on ticker history. The results of the study are provided in the table below:

spread works global banking finance

Helping to reduce client costs, narrow spreads are one of the key conditions for increasing the profitability of trading (this mostly affects traders executing high numbers of transactions). As noted before, dynamic spreads can increase, but this is rare and the period of increased spreads are usually short and easy to predict. In order to avoid losses in these periods, it’s enough to have a certain reserve of funds on account, allowing you to withstand a short slowdown.  Or, one could promptly close positions and not trade on news that cause big movements in exchange rates and increases in spreads. Overall, traders earn a lot more working with dynamic spreads than they do with fixed spreads.  However, one can’t speak about the advantages of dynamic spreads without mentioning the other components of successful trading. First of all, this means quality of order execution:  As a rule, EXNESS executes client orders within 0.1 to 1 second. Given that speed of execution, the company’s specialists have reduced the number of re-quotes to a minimum and practically eliminated gaps for all deferred orders, executed within 3 hours of the opening of trading on a specific Forex instrument.

In summary, we can say with confidence that the successful combination of components like smooth order execution and a narrow dynamic spread allow EXNESS to create truly unique trading conditions, deserving of consideration as some of the best on today’s currency market.