Who is searching for a broker

Those who are searching for a broker to practice online trading, particularly Forex, are called to evaluate many elements. In particular, the costs. The issue is crucial, as the trader's hopes of profit depend, in part, on the costs. The risk is not only to generate profits (which is very difficult in itself), but to see these profits eroded by the costs imposed by the broker. Now, when analyzing the costs of brokers, two items must be evaluated: commissions and spreads. The two cost items could be present simultaneously. However, there are many cases where they are present individually. That is, either commissions are paid or a spread is discounted. In this article, we offer an overview of commissions and spreads, providing comprehensive definitions and listing the cases in which they are actually imposed by brokers.

Commissions

Commissions represent an expense that the trader must make when executing a buy or sell order. The money corresponding to the commission, obviously, ends up in the pockets of the broker, who in this way can finance itself and, basically, is repaid for a service actually provided. There are two types of commissions: fixed or based on the executed amount. In the first case, the commission is always equal to itself. It simply has to be paid every time an order is placed. In the second case, it corresponds to a percentage of the moved volume.

How much do commissions amount to?

In general, commissions, when talking about currency instruments (e.g., CFDs on Forex), are fixed. We are talking about a few euros for each executed lot. In some cases, there is a range. However, it is very rare - even among the most expensive banks - for commissions to exceed 20 euros.

Who imposes commissions?

Commissions are imposed by brokers of all types, both ECN and Market Maker. However, the vast majority of Market Maker brokers waive commissions to focus on spreads. This happens especially when the order concerns an asset and not a derivative product. In this case, actual Forex and not CFDs on Forex. These dynamics mainly concern retail brokers, i.e., those organizations that deal almost exclusively with services for traders. If we are talking about commercial banks that offer also trading services, in a good part of the cases commissions are imposed.

The Spread

The spread is a cost item that has nothing to do with commissions. The logic behind it is completely different. If the commission is simply the cost of an intermediation service, the spread is the cost for a market making service, i.e., order guarantee. In fact, spread is defined as the difference between the bid and the ask, that is, between the real price and the price that the broker imposes on the trader. This dynamic originates from the real service that some brokers provide: guaranteeing the trader's order, taking charge of it and only subsequently trying to recover in the real market. Therefore, when a trader operates with a market maker, they actually operate with the broker. The spread is precisely the difference between the real price and the price offered to the trader. It is no coincidence that in English, spread means "difference". The spread is measured in pips, which is the minimum unit of measurement of an exchange rate.

How much do spreads amount to?

Spreads vary from asset to asset. In general, the more liquid the market, the lower the spread (because the effort the broker makes when trying to execute the order in the real market is lower). Generally, the lowest spreads, even lower than a single pip, are found in Forex, which is an extremely liquid market. On the other hand, the highest spreads are found in stocks and commodities. However, spreads can be variable, i.e., change over time even for the same asset. Some brokers opt for this dynamic, which effectively replicates the movements and fluctuations of the real market in a profitable way for both the broker and the trader.

Who imposes the spread?

Spreads are mainly imposed by market maker brokers. In fact, this type of broker in most cases imposes only spreads. Furthermore, there is the presence of spreads when operations directly concern assets (Forex), and not derivative products (CFDs). The advice, however, is to always check spreads and commissions. Generally, spreads cost less than commissions, but in some cases, the exact opposite could happen. Therefore, analyze brokers from this point of view as well if you want to avoid surprises.