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Forex Brokers

Variable Forex Broker Spreads

Variable Forex Broker Spreads: A Viable Option?

Variable forex broker spreads are kind of like variable rate mortgages: right for some situations, but probably not a good idea for the majority of people.

If you see lower spreads at one forex broker than another, be careful to ascertain whether or not this is due to one broker offering a variable spread versus the other broker that is operating under a fixed spread business model.

The spread is the difference between the "buy" and the "sell" price of a currency pair. The spread is the transaction cost taken by the forex broker.

A variable spread changes depending on market conditions; for example, when the market is very busy, spreads may be lower than when the market is trading at a low volume.

Fixed spread brokers, by contrast, offer the same spreads in both fast and slow markets.

In the Big Picture, All Spreads Are Variable

For a professional trader working at a bank or hedge fund, the realization that all spreads are variable is easy to behold. Traders who have access to the interbank market have a bird's eye view into the reality that currency pair prices are always negotiable.

Like sweaters sitting out on a department store display, currency pairs sit there at certain prices waiting for someone to buy them at that price.

Unlike most shopkeepers, the currency markets don’t wait for stuff that isn’t selling to sell. If stuff isn’t selling, prices drop down until stuff is selling.

And vice versa—buyers can be equally aggressive in dictating price movement.

Retail online forex traders are sometimes not fully cognizant that spreads are not the type of numbers that existing independently of the forex brokers who charge them. Rather, individual forex brokers decide how much they want to charge you to trade with them.

If You Choose a Variable Spread Forex Broker, Expect Variation

When subprime mortgage applicants were signing off by the millions on "option ARM" variable rate mortgage products, many of them didn't know or claim they didn't know that, well, a variable interest rate means that your interest rate will vary.

Let us not, as forex traders, make the same mistake.

If you are signing up to work with a variable spread forex broker, expect that spreads will vary considerably depending on a number of factors. At times of high volume trading, your transaction costs may be lower, at that moment, than a fixed spread online forex broker. At times of lower volume trading, your transaction costs may be increased by the variable spread broker, above what a fixed spread forex broker is charging.

Either way, the broker is going to chip off a fee. Variable spread brokers just change the size of the chip off depending on what's going on with prices.

The uncertainty of working with a variable spread FX broker does not work well for people who trade certain currency pairs, or trade currency pairs at lower volume times of day/night, or trade certain currency pairs at lower volume times of day/night.

If you are trading a currency pair that does not involve the U.S. dollar, for example, variable spreads are going to be more trouble than they’re worth. In that case, pay a pip extra and know your price.

Variable Spread Forex Brokers and the Creepy Sales Guy Factor

When you go into a department store, and each sweater is clearly labeled with a price, you can either buy the sweater or not. When you go into a department store and none of the sweaters are labeled and a greasy-looking dude comes over to you with a "how much you looking to spend?" attitude, that's a very different experience.

Not that all or even most variable spread forex brokers are run by charlatans. That is not what is being implied here. In reality, fixed spread forex brokers are free to - and do - change their spread pricing as well, when they feel like they need to.

The important thing when choosing between a variable and a fixed spread forex broker is to think through the reasons why one may work better for you than the other.

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