I have been asked the question do the bid-offered spreads offered by different brokers really matter?
Spreads matter but the extent to which depends on the type of trader you are. It also depends on the executed spread, meaning whether your trade is executed at or close to the price being quoted. Some refer to this as slippage (the difference between the quote and the actual price a trade is executed by a broker).
Where spreads matter to all traders is when it comes to stops. Forex brokers execute buy stops at the offered price and sell stops at the bid price. Therefore the wider the spread the better chance your stop could get executed the closer the market is to it. This may not make much difference most times but there are times it can make the difference between getting stopped out and staying in your position.
It also depends on the type of trader you are. If you are a high volume, short-term trader who likes to scalp the market, spreads matter more than if you are a swing or trend trader, the latter having the least impact. No matter what the case, trading with tighter spreads should have a favorable impact on your account as a fraction of a pip can add up the more you trade. Take a look at your trades for the month and calculate how much it would have meant to your account.
It also depends on how you place orders. Do you enter and exit using a market order or do you place a limit order. A buy or sell limit order has a better chance of being executed with narrower than wider spreads but only in cases where the market comes close and then reverses when it gets near your price. This may only occur in rare instances but there are times it can make a difference between your order being executed and missing it by a hair. It is those times that spreads matter most (same for stops).
Spreads are only one consideration in choosing a broker but there are times it can make a difference as I described above.
One way to get tighter spreads is to trade with commissions if your broker permits. Â Just be aware that you need to factor in the cost of commission when trading.
Most forex brokers these days offer market executions. What does this mean and why should you beware? I got this from a broker website:
A market execution order is one that’s executed at the best price available in the market. There are no re-quotes, but the price will not necessarily be the one you saw on the screen when you placed the order.
The price the order is filled at may sometimes differ from the price seen on the platform (true broker spread) because:
- the price may have moved from the last market snapshot, or
- the trade volume you requested may be larger than the volume available in the market at the best tradable bid/offer (ask) price shown on the screen
In practical terms, you should get filled at what the current price is when your order hits the broker’s server. Where this really comes into play is in periods of volatility, especially after news events as spreads may widen when banks pull out or widen their spreads. This is when you need to beware, especially when placing stops as they can get triggered by a widening of the bid-offered spread even though the market is not actually trading at your stop level.
Each broker is different so you need to adjust your strategy based on how your broker quotes during times of reduced liquidity or increased volatility. Brokers claim to be market makers but triggering stops based on a widening of spreads, even if unintentional is beneficial to the broker. In these types of cases, you may not have been able to buy (or sell as the case may be) at the rate you were stopped out.
An advantage of market executions is that you know your order will get executed. The drawback is that you may get filled at a price far different than that you hoped for depending on how volatile the market is although platforms do have filters to allow you to limit the amount of slippage. The disadvantage of using such filters is that you may not get your order filled at all in a hectic market.
One solution in volatile markets is to use limit orders and avoid market orders but be aware that you may not get filled if your price is not reached.
So, broker spreads do matter and there are times it can make a difference
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