What You See might not be What You Get!
Competition between brokers to “win” your patronage is ever present. Whilst we do not recommend specific brokers you should always research thoroughly before depositing your hard earned cash with any broker. We do recommend, however, that you only trade with a broker that is formally regulated i.e. with a renowned regulator such as the FCA (Financial Conduct Authority in the UK), CySEC (Cyprus Securities and Exchange Commission), NFA (National Futures Association in the US) or ASICS (Australian Securities and Investments Commission). So you have settled on a selection of reputable brokers and now are looking at the “spreads” they offer.
Most brokers will display their “spreads” on their website. Alternatively, you will see spreads in a demo account, but beware! What you see may not be what you get!!
We all know the “spread” is the difference between the Bid and Ask. So in EUR/USD, for example, you might see a price of 1.11792 (bid) to 1.11798 (offer) simply subtract the lower number from the larger number and you have the “spread”. In this example it is 0.00006 – to simplify most brokers will represent this as a 0.6 spread.
So the tighter the spread the better yes? Well, you would think so but there are certain things to also question/bear in mind.
You will find brokers offering spreads as low as 0.3 in EUR/USD, the most widely traded (and active) currency pair traded. But be warned – just because the spread is 0.3 does not always mean you are actually trading on a 0.3 spread. Many brokers operate market execution utilizing a VWAP (Volume Weighted Average Price). So the spread at Top-Of-Book (TOB) may be 0.3 the volume (or size) available on that spread may be very small – less than a standard lot. So if you were to trade in 5 lots, for example, you will get the available liquidity at TOB and then, most likely get your balance filled at the average price where your volume is actually filled. Other practice involves adjusting the markups in order to show desired spread, but while executed in the market you get the market price plus markup anyway! So they show you what you want to see and execute you at what they want to make!
Another example of not getting what you think you are getting is when you have a broker offering instant execution at the TOB price. Again, be aware that if there is not sufficient volume on the price you are trying to trade on you will get nothing done or a requote.
Slippage on a price can occur in the example we gave above but there are some brokers that will continually “slip” you on a price. When a broker fills you at a price worse than “advertised” it is merely a function of the brokers liquidity providers pricing being unavailable – typically in very volatile markets (remember SNB?) – As the old adage goes “you can’t hit a moving target”!
However, there are some brokers that will make a habit of “slipping” you for their own benefit. For example, if the price is 1.11792-1.11798 and you are trying to sell 10 lots and get “filled” (slipped) and trade at 1.11788 yes, there is the potential that the available liquidity was not there – but what if it was and the broker is intentionally filling you at a worse price? In this example, the broker is making (stealing) USD $40 from you (1 pip on 1 MIO EUR/USD (10 lots) = USD$100. 0.4 pips times USD$100 = USD$40!!)
So beware of claims of low spreads. Some brokers publish slippage data and fill ratios so take the time to research and make an informed decision. Do not rely on the quality of execution you see in a demo account. A demo environment will, generally, have better execution rates because your trades are not real – they are not entering the real market – they are play money and mean nothing. The only way to really understand the quality of execution is by trading on real money in a real funded account – but, as stated, be aware that things may not always be as they seem!!
#tradesafely #doublehit #fxzoo