From the Broker’s Desk – Understanding Spreads Through the Eyes of a Forex Broker

To many traders, the spread is simply an unavoidable cost. But from a broker’s point of view, it’s a central component of the trading model. Let’s step into the shoes of a forex broker and explore what bid/ask prices and spreads mean behind the scenes(read Prof FX).

Bid and Ask Pricing: A Two-Way Market

As a broker, we quote two prices for every currency pair: the bid (buy from trader) and the ask (sell to trader). The bid price is what we’re willing to pay if a trader wants to sell, and the ask price is what we’ll charge if the trader wants to buy.

The spread between these two prices reflects our compensation, especially if we don’t charge a separate commission.

Why Spreads Exist

Spreads aren’t arbitrary. They are based on market liquidity, volatility, and the cost we incur in sourcing liquidity from larger institutions.

How We Set Spreads

- In stable market conditions, spreads are tight, sometimes as low as 0.1 pips for major pairs.
- During major news events, spreads may widen to reflect increased risk.
- For exotic pairs, spreads are generally wider due to lower trading volume.

Fixed vs. Variable Spreads from a Broker’s View

- Fixed spreads are easier for traders to predict but require the broker to absorb some of the volatility risk.
- Variable spreads adjust in real-time, passing market fluctuations directly to the trader.

The Role of ECN and STP Models

In ECN/STP models, we don’t profit from the spread directly but may add a commission instead. These models provide tighter spreads and higher transparency.

Educated Traders Are Better Clients

We believe that when traders understand how pricing works, they make more informed decisions and trade more confidently. That’s better for both the trader and the broker.

Final Thought

The spread is not just a cost—it’s part of a broader ecosystem that ensures liquidity, efficiency, and transparency in the forex market.