Spreads and commissions

The spread

A broker quotes two prices: the bid, at which it buys from you, and the ask, at which it sells to you. The spread is the difference, and it is paid the instant a position opens, because a trade bought at the ask is immediately worth the bid. A spread of 1.0 pip on EUR/USD costs 10 dollars on a standard lot, and the position has to move one pip in your favour before it breaks even.

Spreads are not fixed. Most brokers quote variable spreads that narrow when the market is busy, in the London and New York sessions, and widen when it is quiet, at the rollover, over weekends and around news releases. A broker advertising a spread from 0.0 pips is quoting its best moment; the average spread, which some brokers publish and this site's spread comparison records, is the useful number. A few brokers offer fixed spreads, which are wider on average but do not move.

The commission

On a standard account the spread is the whole charge and there is no commission. On a raw or ECN account the broker quotes a spread close to the interbank market, often 0.0 to 0.3 pips on the majors, and charges a commission per lot instead, typically 3 to 3.50 dollars a side, so 6 to 7 dollars round turn on a standard lot. The commission is fixed regardless of when you trade, which suits traders who trade in quiet hours, and it is visible on the statement, which suits anyone who likes to see what they pay.

Adding them up

The cost of a trade to open and close is the spread in pips times the pip value, plus the commission. A raw account at 0.1 pips and 7 dollars round turn costs 8 dollars per standard lot on EUR/USD; a standard account at 1.0 pip costs 10 dollars; a standard account at 0.6 pips costs 6 dollars and beats the raw account. The comparison changes with the pair, because commission is the same on every pair while spreads on crosses and exotics are much wider, which makes raw accounts relatively cheaper on those.

For anyone holding positions overnight there is a third cost, the swap, which is separate from both and usually larger over a week than either. The swap calculator and the cost of a trade paper in the research section cover it.

What brokers do not show

Two things affect the real cost and appear on no price list. The spread at the moment you trade can be far wider than the average, especially in the seconds around a news release. And slippage, the difference between the price you clicked and the price you got, adds to or subtracts from the cost on every market order. The slippage article and the execution quality paper explain both, and the only reliable measure of a broker's real cost is a trader's own statement, compared with the advertised figures.