Spread: Understand How the Brokerage Profits from Your Operations

Have you ever wondered why most brokers say they don’t charge commissions? The answer lies in a fundamental concept of the foreign exchange market: the spread.

What Exactly Is This Spread?

When you open a trading platform, you notice that there are always two different prices for the same currency pair. This is no coincidence.

The selling price (BID) is the price at which you can sell your base currencies to the broker. The buying price (ASK) is the amount you pay to buy the same base currency. This difference between the two prices is called the spread, also known as the “bid-ask spread.”

But here comes the crucial point: this spread is not free. It functions as the hidden fee charged by the broker to provide liquidity and allow your order to be executed instantly. Instead of charging a separate fee as a commission, the cost is already embedded in the quote you see on the screen.

How Does the Spread Benefit the Broker?

On the broker’s side, the logic is simple: they buy currency at a lower price and sell it to you at a higher price. They also buy your currencies for less than they will receive when reselling them. This difference is exactly what allows them to operate without charging apparent fees.

Measuring the Spread: The Basics

To find out how much you’re paying in spread, just do a simple calculation: subtract the buy price from the sell price. Most platforms already display this difference in pips.

If the quote is at 1.04103 (sell) and 1.04111 (buy), your spread is 8 pips, or 0.8 points.

Two Worlds of Spread: Fixed vs. Variable

Fixed Spread: Predictability with a Price

The fixed spread never changes. Regardless of the time of day or market conditions, the difference remains the same. Brokers acting as market makers use this model, buying large positions from liquidity providers and passing them on to retail traders.

Advantages:

• Predictable costs at any time
• Usually lower initial capital

Disadvantages:

• Re-quotes: during periods of high volatility, the broker may reject your order and offer a different price
• Slippage: when the market moves quickly, the broker cannot maintain the fixed spread, and you end up closing the position at a completely different price than expected

Variable Spread: Transparency with Flexibility

Variable spreads constantly change according to market supply and demand. Non-dealing desk brokers (those that pass prices from multiple liquidity providers without their own intervention) use this model. Since they do not control the spreads, they naturally widen or narrow with volatility and available liquidity.

Advantages:

• Much fewer re-quotes
• Greater transparency in operations

Disadvantages:

• Wide spreads destroy quick scalper profits
• News traders suffer even more when the spread widens during periods of high economic volatility

Calculating the True Cost of Your Trade

Knowing the spread in pips is not enough. To calculate the actual cost, you need to multiply the spread by the pip value and the volume you are trading.

If you trade 1 mini lot (10,000 units) with a spread of 0.8 pips:

Cost = 0.8 pips × 1 mini lot × $1 (pip value) = USD 0.80

With 5 mini lots, the cost would be USD 4.00.

The higher the volume, the greater the impact of the spread on your final result. That’s why active traders need to pay extra attention to this seemingly small detail.