It is common knowledge that the spread is the difference between the BID price (the price you sell at) and the ASK price (the price you buy at). It is some kind of a commission or fee any Forex or stock trader is charged with.
It is noticeable that not so long ago a 50 or 100-point spread was considered a standard. Only tougher rivalry made the brokers lower their spreads. Nowadays most dealing centers and brokers offer their clients fixed (or static) spreads, which means they do not depend on the market liquidity. The initial interpretation implies a dynamic or classic spread. However it should be noted that at the real currency market a fixed spread is pure fiction.
One of the main aspects of trading is the profit-loss ratio of each trade. Along with a wisely placed stop loss order or a “lock”, determined movement targets and prearranged plan of maintaining the trade, the spread should also be taken into account, especially as an inseparable part of trading expenses. The spread is the main source of income of any honest broker.
Anyone wants to reduce the expenses. In this case it can be implemented through proceeding from the well-known static spread to the dynamic spread. In order to get a more detailed explanation we addressed the experts from EXNESS Co., as it was among the first to allow their clients to use dynamic spreads.
Market Leader: Could you tell us please why your company offers its clients dynamic spreads?
EXNESS: The thing is that at Forex, as at any other exchange market, there is no fixed spreads at all. In real trading there cannot be any static spread because supply never moves synchronously with demand. Consequently, a fixed spread is a soap bubble which is far from the market reality and is created by dealing centers to attract a lot of clients. Besides, the size of a fixed spread considerably exceeds the one of the dynamic spread when the liquidity of the traded currency pair (or asset) is normal. We get the quotes from some major market-makers. That is why our spreads are only dynamic ones.
Market Leader: For example, what is the average spread for GBPUSD? What are the peculiarities of trading with dynamic spreads?
EXNESS: As the result of optimizing the work with our liquidity sources the company’s experts managed to significantly reduce the average size of the spreads for the major currency pairs. When the liquidity is normal (standard) the average spread for EURUSD moves within 0.6-1.2pts, for GBPUSD it is 0.6-2.3pts. First of all trading with dynamic spreads is beneficial for “scalpers” as the cost of every single trade is significantly reduced. The more trades they open the more they save with dynamic spreads. That is why the dynamic spread is the best possible choice for “scalpers”. The minimal spread is also advisable for intraday trading while in mid-term and long-term trading, where a trade can be maintained for weeks or months, spreads are not so relevant. Swaps are more important for such traders.
While utilizing dynamic spreads traders should understand that during the times of high volatility the spreads can be significantly widened. In such situation locking is dangerous as during major news releases the spread may be widened to such an extent that it would lead to the forced termination of all the opened positions because of the margin call. That is why beginners should remember that trading the news is extremely risky.
Market Leader: So, even when the trade is locked the deposit is under threat anyway. Can you please explain why it happens?
EXNESS: The thing is that when the price suddenly and rapidly increases the floating result for locked positions stays the same only when the spread is fixed. When the spread is dynamic (changing) the amount of the spare funds will always decline, which may eventually result in a margin call.
It happens because the profit of BUY trades depends on the BID price while the profit of SELL positions (or trades) depends on the ASK price. When the spread is widened, one of the positions of the lock becomes increasingly losing while the other part of the lock cannot make up for the potential loss. That is why the net profit for locked trades declines dramatically, which means a sharp decline in spare funds.
Wider spreads during various major news releases are usually temporary (short-term). If the spare funds are quite enough it doesn’t affect the locked trades. If the spare funds are not enough a spread spike may result in a margin call.
Market Leader: Now let’s take a look at the spread through the broker’s eyes. On the one hand, low spreads are very attractive. But on the other hand, the spread is considered to be any broker’s main source of income. That is why too low spreads are not beneficial for brokers and dealing centers, which should make traders cautions. How is it possible to maintain the balance of interests between the broker and the client when providing dynamic spreads?
EXNESS: Our clients are offered maximum competitive trading conditions. Of course, we are interested in new clients and long-term cooperation with them. That is why we keep improving the trading conditions we offer. Of course, too tight spreads should make traders cautious as some brokers offering such spreads may show negligent execution of the clients’ orders, intensive manipulation with quotes and slippage. However such poor-quality service cannot imply long-term cooperation. EXNESS has set other goals. Tight dynamic spreads together with minimal re-quotes and slippage are compensated by constantly growing volumes. In January 2010 the net trading volume of EXNESS reached $2.01 billion. In June 2010 it was $4.83 billion while in November it reached $11.17 billion. This is the current balance of interests. That is why we strive to create the most favorable conditions for our clients while constantly improving the quality of executing the clients’ orders, withdrawing/depositing their funds and other aspects, which make trading with EXNESS much more convenient.
Market Leader: Not many beginning traders know about the correlation of spreads and re-quotes (we wrote about it in the article “Re-quotes - brokers’ politeness” published in issue 18 of the Market Leader magazine). Would you please tell our readers about the essence of this correlation?
EXNESS: In our company the max value of the deviation of the order price from the real market price depends on how wide or narrow the spread is. Consequently, the wider the spread is the higher the probability of getting a re-quote is. However it is sufficient for a trader to change the “Slippage” (max deviation) setting of his/her MT trading terminal before sending an order (having changed the setting to 1 point, for example). In this case the amount of re-quotes will be considerably reduced or even eliminated. The value of the max deviation influences price deviations in both the sides. It means that a certain order can be executed at a worse or better price. So, it is possible to reduce the amount of re-quotes without the one-sided worsening of the opening price of a trade.
Market Leader: Thank you very much for being outspoken! Indeed, real dynamic spreads without constant re-quotes is something extraordinary for modern Forex dealing centers and brokers. Thanks to you we have managed to finally clarify the question about the dynamic spread as well as about its strong sides and peculiarities.
EXNESS: Thank you for an interesting interview! I would like to wish you and your audience the best of luck and big profits! Keep in mind that EXNESS is a comfortable trading environment created for you by professionals!
And finally, we would like to add that any Forex trader planning to proceed to the real market trading should try dynamic spreads. We wish you the best of luck and big profits as well!
About the company:
EXNESS Company was founded in 2008 in Saint-Petersburg (Russia) by a team of experts in trading and info technology.
Nowadays the company provides a range of unique high-quality services for beginners and professionals:
· Tightest dynamic spreads. It is an important trading condition of any broker. It becomes weightier as the amount of opened trades for a single account grows.
· Leverage up to 1:1000. Almost unique offer for professional traders
· Excellent execution of orders. Minimum re-quotes and slippage combined with high speed of execution provide almost unlimited opportunities in terms of using various trading strategies.
· Hedging the trades. The company guarantees the withdrawal of any profit due to the fact that it hedges the cumulative positions or individual trades with institutionary participants of the market.
· A great variety of trading instruments.
· Auto-withdrawal of funds. It is an exclusive service allowing traders to get the money much faster.
· Multiple ways of withdrawing/depositing funds: bank transfers, credit card payments or payments via numerous EPSs (electronic payment systems).
· VPS-service. Free access to the remote terminal expanding the possibility of using numerous expert advisors and trading “robots”.
