Some forex brokers advertise tighter spreads but when you trade you often don’t get the spread quoted. Is this typical and how do you determine the true spread?
When online forex trading started, spreads were wider and most forex brokers executed trades at the quoted price. As spreads tightened, more brokers moved to market executions, which means the trade is executed at the price the broker is quoting when your trade hits its server.
This means the faster your internet connection (and computer) the better chance of the trade being executed at or close to the quoted price. The slower the connection, the better chance of getting filled at a price different than being quoted.
Some may refer to this as slippage and that may be true for those brokers who do not provide a level playing field. For those brokers who play it straight, it is a matter of internet speed determining how close the fill is to the quoted price. This is an argument in favour of trading with a regulated broker in a major centre as the oversight is likely to be more stringent for these brokers. .
Executed Bid-Offered Spread
I have seen the term “executed spread” used to describe the “true” spread. This refers to the price at which a trade is actually executed relative to the price quoted. As an example, let’s say a currency is quoted at 1 pip spread (e.g. 1.2735-36) but on average, your trade is executed .2 pips off that price (e.g. 1.27348-1.27362). In this case the true or executed spread is 1.4 pips and not 1 pip.
One way to determine your true spread is to keep a log of prices actually traded vs. the prices quoted and then calculate the average difference. You can also go one step further and calculate the number of trades where fills are better than the quoted price vs. number of trades where it is worse. The same can be done for the price at which stops are executed.
In any case, the quoted spreads are not always the executed spreads and it is up to the trader to determine the true spread. You then have to determine whether any legacy issues involving your internet connection and/or computer is a cause of any differences or it is an issue with your broker.
Jay Meisler,co-founder,global-view.com
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