As we explained in our article about comparing forex brokers spreads have to be one of the primary factors when choosing your broker, especially if you are an active trader. When using high-frequency, automated strategies, reliable and low spreads are essential. For some traders, it may even make sense to open more accounts for different strategies.
The reliability of the spreads is often as important as the average width of them. Why? When markets are volatile a lot of strategies trigger trades—those are the times that really matter. And with some brokers with variable spreads this can cause major losses for the unaware traders.
Let’s see the best choices out there in terms of spreads!
Fixed versus Variable spreads
The first question you should ask yourself is that would you prefer a fixed cost for trading a certain instrument or would you take your chances with a variable fee structure that can lead to a lower or higher fee at the end of the day.
There is a third category called fixed with exceptions; these brokers don’t guarantee the fixed spreads in volatile markets like around news releases.
ECNs/DMAs versus Retail Market Maker Brokers
If you know a little about the structure of the market and you have your preferred strategy than it is relatively easy to determine the way to go.
The two basic types of brokers are ECNs and Retail Market Makers; the main difference between them is that ECNs only transfer certain traders’ and institutions’ orders while RMMs pool and aggregate orders. That means they basically trade against their clients and set spreads themselves.
DMAs are a bit of a hybrid but you only need to know that they provide ECN-like service.
To make it very simple an ECN is great for volatile markets but not really useful in less liquid pairs and situations. Why? Well, in volatile and liquid markets you can have truly zero spreads with an ECN as a lot of traders enter orders on both sides of the market. On the other hand, there is no guarantee whatsoever about the spread when there is less liquidity present—a market stop loss order may lead to huge slippage.
Also, there is always a commission when trading an ECN, although that might be zero in some cases if you provide liquidity through a limit order.
It doesn’t really make sense to choose an RMM with a variable spread as that takes away the advantage of being able to calculate the costs of every trade. So if you decide to choose an RMM because of spreads make sure that it has a fixed spread and a relatively low or zero commission.
RMMs are great choices when trading automatically in all market conditions and exotic pairs as a fixed spread makes it very easy to calculate stop losses and profit taking orders. But if you trade in liquid hours with liquid pairs ECNs might be the better choice.
Now you see why a pro-trader might have accounts with both types of brokers for different types of strategies.
A common catch is the weekend market, sometimes provided with wider fixed spreads by RMMs. It’s not a bad thing necessarily, but can be a fertile ground for running stops (deliberately triggering stop loss orders) and kicking you out of positions, so be careful with these markets.
The hunt for the 0 spread
So now you see that a free trade is really possible if some circumstances (ECNs, volatile markets, major pairs). But on the long-run it’s not necessary the best thing to do to chase that. Choose a broker or brokers according to your needs—not because of the search for a fancy zero spread.
The best ECNs and Retail Market Makers
Now that you know what they are good for here is a list of the best of both worlds:
Some of these companies have both ECN and Market Maker accounts so it is possible to have two types of account at the same broker. You should check the other factors like minimum requirements, regulations etc. before deciding, but you won’t be disappointed with the spreads if you choose one of these brokers.