*This is a collaborative guest post
Forex traders in the UK are on the hunt for the tightest spreads. Why should the Ask and Bid prices be as close as possible? Here is everything you need to know about low spreads and brokers offering them in 2022.
This price gap constitutes profit for market makers. ECNs, on the other hand, have zero spreads but charge a commission. Top-rated low spread brokers in 2022 include companies regulated by the FCA, the CySEC, and other credible financial watchdogs. Let’s look at their key advantages.
Why Does Spread Matter?
This term is not limited to foreign exchange. For a trader, it describes the cost per transaction. The bigger the difference between Ask and Bid, the more they pay to buy and the less they get from selling.
Market makers define prices themselves based on a combination of market factors. Their spreads reflect the difference between actual and listed prices for the same pairs. It is a source of profit just like commissions for ECNs
What Is Low Spread?
At first glance, spreads may seem minuscule. Typically, they amount to several pips — i.e., a fraction of a per cent. If you look at the big picture, you will see how easily your costs can add up to a hefty amount.
These implicit upfront expenses are particularly high for those who use leverage or trade high volumes. The tighter the spread, the closer your price is to the actual market price.
The Benefits of Low-Spread Brokers
Obviously, cost per transaction decreases as spreads tighten. In addition:
- Trading through such brokers is more direct, as their prices are closer to the actual market situation.
- It is easier to calculate potential profit and loss per trade.
- The barrier to profitability is lower. For example, if EUR/USD has a Bid price of 1.0663 and an Ask price of 1.0667, the difference is 4 pips. If you bought and immediately sold the pair back to the broker, you would make a loss. It would be necessary to wait until the pair appreciated by at least 5 pips.
- Low spreads are vital for day traders and scalpers, as they place multiple trades daily.
Risks with Low-Spread Brokers
Spreads reflect actual market liquidity. The higher it is, the easier it is to buy or sell a particular currency. For example, major pairs like EUR/USD are the most liquid, while niche currencies like the Thai baht are more difficult to trade.
Pairs with low liquidity have higher spreads, as they are more expensive for the broker to facilitate. If a market maker has low spreads on the most exotic currencies, this should raise suspicion. The company is probably making money from you in other ways.
To Sum Up
Spreads are a major source of profit for brokers that work as market makers — i.e., set their own prices. Lower spreads translate into lower costs per trade. They are usually the widest for exotic pairs.