The spread is one of those elements of trading that all the investors, even novices, cannot afford to ignore. In addition, it deeply affects their chances of profit, and especially it does it directly.
In order to avoid negative consequences on the activity of trading, it is therefore advisable to make some choices on account of the spread. For example, the choice of the broker. After all, the spread is related to the relationship trader-broker. One of the brokers which best deals with the spread (especially on the trader’s side) is Key To Markets. Why? It is simple, it offers very low spreads.
What is the spread
There is much of talk about spread. To avoid ambiguities, it is important to make a clarification. The spread in trading has nothing to do with the spread mentioned on TV. That one is an indicator of the value of the Italian public debt (with respect to the related German one). So, what is the spread in trading? In the next paragraph we will give a short but complete definition.
The definition of spread
The spread is the difference between bid and ask. It is the difference between the real price of an asset and the price with which the trader operates. It is right, in the majority of cases, and always when talking about spread, the trader does not operate with real prices. It can appear as an uncomfortable truth, even shocking. In reality, it reveals a totally physiologic dynamic. The spread is in fact as legitimate source of profit of the broker, the price the trader has to pay to have guarantee that all their operations are really executed.
The brokers are free to set the spreads as they please. In fact, the game of the acquisition of new clients is also played with the spreads. However, the margin of discretion is not infinite, more and more often certain calculation protocols are executed.
How the spread is calculated
Rather than a precise calculation, we signal protocols and factors which impact the spreads more or less the same way. However, there is a constant: the unit of measurement, the pip. Moreover, in the vast majority of cases the broker sets a spread for each of the assets offered. Anyway, here are the two factors that mostly affect the spread.
Liquidity. The higher the liquidity, the lower is the spread. Therefore, the most liquid assets, such as euro-dollar, have the lowest spread, generally of the order of magnitude of some tenth of pip. The reason is simple: if the asset is liquid it is easier to place orders in the real market, therefore the effort for the broker is minimum.
Volatility. The higher the volatility, the higher is the spread. In this case there is a relationship of inverse proportion. Also in this case the reason is easy to see: if an asset is volatile, the risk that the ratio between bid and ask disadvantages the broker is higher.
Fixed or variable spreads
When talking about spreads, we should distinguish between fixed and variable. Some brokers opt for fixed spreads, others for the variable ones. It really depends on the case, neither of the alternatives prevails on the other.
However, which option favours the trader? In reality, to answer this question we need to look at minimum spread set by the broker. If it is high, the fixed spread is more convenient to the trader. In fact, if it already starts from a high basis, even variations of increase by some pips can cause serious damage.
In a scenario now saturated with brokers, it is Key To Markets to offer the most favourable setup to the traders. In fact, it proposes very low and variable spreads.
How to asses the spreads?
We have already mentioned that the spreads are decided by the brokers with a certain margin of discretion. This (relative) freedom can cause some disorientation to the trader. Substantially, they might not understand, at least not at first, when a spread is high or low. The most effective way to assess the spreads is to compare them with those from other brokers. The most rapid, but still effective way is to identify a benchmark and make a single comparison. This benchmark may well be Key To Markets.
Therefore, it is advisable to consider values that Key To Markets can offer in terms of spread.
In line with tradition, it is the euro-dollar pair which has the lowest spread. We are considering mobile values, that is true, however the spread is around 0.3 pips. The other pairs follow: pound-euro (0.4), American dollar-yen (0.4), Australian dollar – American dollar (0.6). Surprisingly, also the spreads related to some indices are very low, such as the DAX30 and the S&P500 (0.9 and 0.5 respectively).
Gold has a slightly higher spread, around 1.9. Reasonably low are also the spreads of the commodities. For example, the Brent and the WTI, rarely go above 0.7 pips.