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Forex Traders Bill of Rights
Spreads
OANDA Innovations
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Spread Questions for Forex Brokers
Transparency with respect to spreads enables you to understand not only what you are paying, but under what circumstances and why. It will quickly reveal the presence-or absence-of value. The following is a list of questions to help frame your evaluation of forex brokers with respect to spreads. OANDA's answers to these questions are included below. Question List
Explanations and OANDA's answersWhat are the typical spreads?Not just for one or two of the more popular currency pairs, but for all of them. You don't want to be constrained from trading new pairs later on. "Loss-leader" pricing has no place in forex markets.
Are the spreads fixed or variable?The interbank forex market has variable spreads. If you are trading fixed spreads you are in effect paying for an insurance premium -unless you trade only around news when markets tend to be more volatile --- since fixed spreads are traditionally higher than variable spreads.. Is it worth it? That depends on your trading pattern.
If the spreads are fixed, then you should also ask: Are there any exceptions to the fixed-spread policy? Any at all?If you read the fine print, there may be. And if so, you are paying for insurance without getting full coverage. Make sure the exceptions are clearly spelled out. Precisely. And find out when the policy on exceptions last changed to gage how frequently the rules change. Are there any restrictions on trading or entering orders around news announcements?Again, if there are, then what are you paying insurance for? Make sure any restrictions or conditions are spelled out.
Do the spreads differ depending on ticket size?In the interbank market, spreads are wider for larger ticket sizes. When you review typical spreads it is important to understand for what ticket sizes the spreads apply. And if spreads differ depending on ticket size, find out what the typical spreads are for different ticket sizes. All too often, brokers offering matching platforms display very tight spreads, but these spreads apply only to very small ticket sizes.
Do all clients on your platform get the same spreads, all of the time?Or does the spread depend on who you are, how large your account is, or who introduced you to the broker?
Even if everyone gets the same spread, ask: Are there clients who get rebates or volume discounts?If so, guess who is paying for the rebates. If different clients get different spreads, then find out what you have to do to join that privileged group that gets a better spread.
Does a portion of the spread for any client go to anyone other than the firm?Forex brokers frequently agree to pay third parties-such as introducing brokers and sales agents-a portion of the spread on your trading activity. While some firms argue that introducing brokers are not really getting a portion of the spread, don't be fooled. Ask if the introducing broker is being paid in direct proportion to your trading activity. There is nothing inherently wrong with this practice, but it is a fact worth knowing. Only then can you decide if the introducing broker is providing enough added value for the amount you are (indirectly) paying him. And you should also ask if you could get better spreads by cutting out this middleman and trading directly.
Or more generally: Does anyone other than the firm itself get paid as a result of your trading activity?You'd be surprised, but some firms pay their traders and sales agents in proportion to the firm's profit on your trades: a nice conflict of interest that raises inevitable questions about quality of execution.
Does the firm have an open, uncensored forum where their clients can post trading experiences?Open, uncensored forums are a good place to get an initial understanding of what existing clients think of the broker's platform and quality of execution. It is important to have access to all posts for at least the last 12 months. If this sort of information is not available, ask why not. And note that "chat rooms" are something different, typically because their purpose is not to warehouse the historical information you need. But beware: since the Internet allows for anonymity, it is often very difficult to determine who is really behind a post. How do you separate real concerns, real problems, and real compliments from, say, posts by agents working on behalf of a particular broker? There are some generally recognized guidelines. Note the total number of posts made by any individual, and read some of their previous posts to judge their credibility. Discount extreme comments by traders who are new members or who have posted only a few messages. These individuals are most likely guerilla marketers who blitz forums-sometimes overtly, at other times covertly.
How does the broker's demo platform differ from their real platform in terms of execution and spreads?A demo platform can be useful to observe how prices and spreads vary under different market conditions. And it can give you an idea of how good the quality of execution is-but only if the demo platform behaves exactly the same as the real one. Beware: rejected trades, delayed execution, price-skewing and stop-hunting often happen only on the real platform. And sometimes, even spreads may be different. Is there a time limit or "trial period" for using the demo platform? (One of the best uses of a demo platform is to test new trading strategies over time.)
What is the minimum to open an account, and what is the minimum trade size?Unfortunately, the only way to truly test quality of execution is to try the real thing. Some brokers will impose a minimum account opening balance or require a minimum trade size and as a result testing a platform can be prohibitively expensive.
Asking tough questions and carefully sorting the answers can tell you a lot about a broker. |
