Floating and Fixed Spread
The difference between Bid and Ask prices is the spread, which is calculated in pips. Taking into consideration the size of the spread is an important factor during trading, because high spread results in a significant share of loss to the client during active trading.
Brokers, operating in Forex and CFD markets, offer their clients various types of trading accounts. These accounts have different trading conditions with various methods of spread formation.
In this regard, the terms of trade for financial instruments may be classified under two large groups:
- Instruments with fixed spread
- Instruments with floating spread
What is fixed spread? As it may be assumed from the name, fixed spread does not change depending on time or general market fluctuations and volatility. However, in case of low liquidity and high volatility the spread may temporarily be changed, i.e. be transferred to the new fixed spread level; when the market returns to its normal condition the spread is changed back to its general level. However, despite these rare situations trading with fixed spread is more convenient and beneficial for clients, as it is more predictable, thus less risky.
In recent years in conditions of high competition, brokerage companies are constantly trying to offer their clients innovations, and this refers to spread as well. Increasing number of companies are adopting floating spread.
What is floating spread? Floating spread on Forex and CFD markets is a constantly changing value between Ask and Bid prices. Floating spread is a completely market phenomenon and, most of all, interbank relations are characterized by it. Thus, along with the usual trading accounts with floating spread, a number of companies offer clients so-called ECN accounts (Electronic Communication Network). ECN Forex broker provides a platform where participants (banks, market makers and private investors) trade with each other, by placing buy and sell orders in the system. As usual, clients have lower spread trading on the ECN platform, but, at the same time, they pay commission to the broker during their operation.
In general, if comparing two types of spreads and deciding which spread is more beneficial for clients, from our point of view - it is the fixed, but rather narrow one.
Usually, by advertising floating spread, brokers emphasize the factor of being truly "market" type and more narrow than the fixed one. Theoretically this is true, but in real trading practice, especially in an active and volatile market, customers with floating spread face problems to which they are not ready. One of such problems is that the spread may increase up to 8-10 pips for the main currency pairs. In addition, orders may be executed at prices significantly higher than the indicated spread and, therefore, the client cannot complain to the broker. Systematically trading traders, constantly using stop orders, cannot fully predict their trade, as the broker can specifically disrupt the "stops", recalling the market situation.
Thus, it is worth to note again that the fixed narrow spread is more convenient and predictable for customers, compared with floating spread.