Forex Articles - Spread the Word

Spread the Word, Headline Forex Spreads can be Misleading

Sep 28 • Forex Trading Articles • 6453 Views • 3 Comments on Spread the Word, Headline Forex Spreads can be Misleading

A friend of mine is a director of a leading UK spread betting firm. He has every right to be incredibly proud of his and his company's achievements over the past two decades. That industry has also made massive strides to improve its quality of service and moreover the basic cost of doing business – the spread. Financial spread betting firms can no longer be regarded as the 'bookies' of the trading world. It's not uncommon for spread betting firms to offer spreads similar to Forex brokers, for example, one pip spread on the Euro. The SB firms offer a wide range of products to bet on; indices, CFDs, shares, commodities and the huge attraction for UK based traders) is the apparent tax free element of any trading profits.

If you regularly visit any trading forums (where spread betters exchange views) you quickly realise how they not only wear their trading naivety on their sleeves, but also betray their overall levels of ignorance towards the forex industry in particular. The constant battles, with any representatives of the industry who venture onto the forums, generally concern the cost of the spread. "ABCD firm is doing cable at one pip but you're still at two, when are you going to get competitive?" is a typical question which is met with good humour and grace through gritted teeth by the firms' representatives. But alas the same question keeps on coming, day after day, month after month from the inexperienced, those locked in a 'denial loop' and those who are desperately in need of a reboot of their badly corrupted personal trading hardware. If you interject by suggesting that; "anyone that rate sensitive must be either attempting to scalp or day trading off low time frames, the absolute death of a spread better", the answers are incomprehensible and very defensive.

Similarly suggestions that anyone using a spread betting firm for anything but swing and position trading is "picking up pennies in front of a steam roller" is met with equal hostility. But the facts (straight from the horse's mouth) are incorruptible; only 20% of spread betters' trades are winners and 80% of those winners are swing and position trades. Therefore no one should ever contemplate using a spread betting firm for any trading other than swing and position. If swing trading, aiming for perhaps a minimum return of 100 pips profit per trade, but ideally 200 with a R:R of 1:2, why would a spread of 1 pip or max 2 pips be relevant, would the spread better be happy with 99 pips profit as opposed to 100? Or consider it this way; if the spread better's set up worked perfectly on GBP/JPY would the spread better avoid the trade given the spread on that currency pair was minimum 6 pips? Whilst spread betting has its place in the trading world arguably it has no place in forex trading, particularly if you're a specialised scalper or day trader, and judging by the majority of responses from spread betters on trading forums sadly they have no business trading on any time frames until they have gained a thorough education.

With ECN NDD straight through processing you know your broker is dealing your trade through to the liquidity providers, there is no intervention, it's an instant fill (depending on market conditions which we're all subject to), and that fill, as instantaneous as state of the art technology can deliver, is one of the most important differences between the spread betting industry and the 'pure play' forex provider. Is there any point in a spread betting firm publicising spreads of 1pip if they have a delay of second causing your fill to actually make the spread two to three pips? The inexperienced, obsessed with headline spreads, would have no metric or technique to judge the efficiency of the spread. Whilst they're constantly seduced by the narrow 'headline spread' they could be getting poor fills and 'designer' slippage but not a true reflection of market conditions but be none the wiser, still believing they're getting zero spreads.


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The overall quality of execution measured over a protracted period of time is just as important as the headline spreads you’re trading on. low spreads should simply be an absolute given with a true ECN NDD broker, FXCC are amongst the best for spreads if not the best in the industry, but that small cost of business only illustrates one aspect of the quality of execution. With ECN NDD execution, there are no re-quotes, there's no dealer referral, and no restrictions on how close you can place stops and limits to the current market price. These are tools that market makers (such as spread betting firms) can use to manage their own risk and these tools can be used to disadvantage the individual trader.

If you're an experienced forex trader you'll have no doubt experienced positive slippage, you're very unlikely to experience that from a market maker or spread betting firm and it's actually a brilliant test to ensure the probity of your broker. You'll only ever experience true marketing behaviour which, as experienced traders will testify, can be quite random at times, quite simply a broker such as FXCC doesn't 'make the market' for forex transactions. The pricing engine from FXCC's liquidity providers automatically takes the quotes from the liquidity providers and offers the best bid/ask with a pip "mark-up”', the small profit for transacting the business. The spreads can and do vary due to liquidity and market volatility, but when you can click on the ticket from an ECN NDD broker you can have absolute confidence in the clarity and cleanliness of your trade.

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