What is Spread in Forex?
The difference between the asking and the selling price of an underlying financial instrument is known as the spread. In other words, it’s the price you pay while making a transaction. Spreads are a crucial element of forex and CFD trading. Before opening an account with a broker, you might want to check whether the spreads (currency transaction cost) available with your selected intermediary align with industry standards and suit your trading style and budget. For instance, a large spread might not appeal to day traders.
Typically, the spread on major currency pairs like EURUSD could be anything from 1 pips to 5 pips. Notably, spreads can shift anytime, depending on the market’s volatility. For example, If the Euro/U.S. Dollar exchange rate is 1.13020/1.13010, the asking price is 1.13020, and the bid price is 1.13010, then the spread is 1.13020 minus 1.13010, which equals 0.0001 or 10 basis points or 10 pips.
How are Spreads Calculated?
The number of investors actively trading a particular currency pair or market’s liquidity is the primary factor determining the spread. If the trading volume is high, the spread will be small, whereas if it’s low, the spread will be large.
For spread calculation, you may deduct the bid price from the asking price, divide the result by the asking price, and then multiply it with 100 to get the spread as a percentage, i-e 1.1302 (ask) – 1.1300 (bid)/ 1.1302 (ask) x 100.
A few exogenous factors can also influence forex spreads, such as time. The time when you initiate a trade is critical besides the market liquidity. For example, U.S. clients can trade the European session in the early morning, while trading in Asia begins late at night for the U.S. and European traders.
So, the spread for a position initiated in EUR during Asia’s trading session instead of Europe’s is likely to widen (more expensive) than if you had opened it during Europe’s trading session, and that’s because of the liquidity element. The lack of liquidity occurs when there are not enough buyers or sellers of a currency to keep its price stable during unusual timings.
Notably, forex spreads can also widen due to economic and geopolitical events. For instance, if the U.S. unemployment rate turns out to be significantly higher than expected, the dollar value will decline relative to other currencies. As soon as the news gets released, the foreign exchange market can flick and become highly volatile. Because of the volatility in the market, forex spreads can be huge.
Not to mention, forex brokers often impose a wider spread during event-driven volatility since it becomes more difficult to accurately predict the prevailing currency rate.
What are Zero Spreads Forex Brokers?
Brokers providing zero spreads accounts are generally known as zero spread forex brokers. They offer spreads starting from 0 pips for interbank quotes and typically charge a predetermined commission on each trade. There are instances when the demand for buy and sell orders is so strong that the spread drops to zero. However, this does not always happen.
While there are several types of forex brokers, the ones with zero spread accounts are often No Dealing Desks. They are sometimes called Straight Through Processing (STP) or Electronic Communication Network (ECN) Brokers.
Since a deep understanding of the financial markets and profound trading knowledge is crucial to making the most of the benefits zero spread accounts offer, they are generally well suited for skilled professionals and high-volume traders.
Pros and Cons of Zero (0) Spread Forex Brokers
- Offers direct access to live market spreads for a nominal markup.
- Doesn’t restrict clients from shifting trade bias.
- Pricing is sourced from multiple liquidity providers.
- Can be instigated to use more leverage.
- Might not offer negative balance protection
Do Zero Spread Forex Brokers Charge Commission?
Yes! Zero spread forex brokers do charge a commission. Usually, forex brokers offer zero spread accounts to attract potential clients. However, they must find other means of generating income as they cannot profit from spreads. At this point, the commission becomes relevant.
For example, Pepperstone offers a zero spread account. While it keeps its spread at 0.0 pips for different currency pairs, the company charges a $3.5 commission per lot.
Zero Spread Vs Standard Accounts
Zero Spread Account
Zero spread accounts enable investors to calculate their trade executions with pinpoint accuracy without worrying about spreads widening. Furthermore, calculating losses from activities other than trading also becomes handy with zero spread accounts. Although this account does not involve a spread, it does have a commission cost per lot. Moreover, the commission may vary from broker to broker.
Most brokerage firms dealing in forex and CFD trading provide their clients with Standard accounts. Traders signing up for this account have access to standard lots. Clients can also use leverage offered by almost all brokers to initiate a position with a fractional amount. A standard account is typically available at a minimum deposit and comes with a raw spread charging policy. For example, clients can open a Raw ECN account with a minimum deposit of $50 at Vantage Markets. However, some brokers allow clients to start with even a lower amount and might have a fixed spread charging mechanism. Since full-lot trading requires a sizable initial investment, brokers like to provide premium services and perks to those who maintain such accounts.
Here is a list of a few brokers offering zero spread and standard accounts.
The broker has EDGE Razor and EDGE Standard accounts on its list of offerings. Both accounts provide direct access to some of the major liquidity providers across the globe.
- EDGE Razor – Zero spread account: A commission is added to raw spreads starting from 0 pips on the Razor account. Traders that specialise in scalping and those who want to use Expert Advisors will prefer the Razor account.
- EDGE Standard: On the other hand, the raw spreads are marked up by 1 pip for the Standard account, but there are no commissions. Those who want the bare essentials in an account may choose this one. With the commission already factored into the spread, this account seems well suited for novice traders.
2) Vantage Markets
Vantage Markets allow clients to open either a Standard Straight Through Processing (STP) or a Raw Electronic Communication Network (ECN) account.
- STP – Zero Spread Account: Clients do not incur any commission on the Standard account. However, the spreads paid over the Inter-bank rate provided by the broker’s pricing partners are subject to a markup.
- Raw ECN Account: All of the spreads from the company’s pricing sources can be seen in the Raw ECN account. Every round turn of a regular lot on this account will incur a commission fee of $6.
3) Think Markets
You can either choose between the Standard account and the ThinkZero account or hold both of them at ThinkMarkets.
- Think Zero – Zero Spread Account: Traders can access true institutional pricing without the broker’s markup. That means the spread in this account starts from 0.0 pips. The only cost you need to pay in the Think Zero account is a nominal commission.
- Standard Account: Clients can open a standard account with the broker for any amount that fits their budget. This account doesn’t involve any commission cost but comes with spreads starting from 0.4 pips.
What are the Advantages of Using the Zero Spread Accounts over Standard Accounts?
An electronic communication network (ECN) or raw spread account provides traders access to actual market prices across the board. Raw spreads are typically very small or even zero, as brokers do not add a markup to asset values. However, the commission rate for each position a trader initiates is higher. Furthermore, brokers charge commission either when a trade is opened (“per side”) or closed (“per round”).
On the other hand, asset pricing in a standard trading account typically includes a markup from the broker. The spreads will be wider, but the trade commissions will be lower or even zero. Traders’ perspectives may vary depending on their preferred trading style or approach. Zero spread accounts could be more suited to the needs of a scalper who seeks to capitalise on minute fluctuations in asset prices. However, investors who like to engage in swing or position trading might prefer sticking to a standard account.
Notably, both accounts come with their own merits and demerits. A longer-term plan allows you more flexibility in selecting trading accounts, as you are less reliant on each one having precise pricing than with shorter-term methods.
Are Zero (0) Forex Spread Accounts Good for Scalping?
Scalping is a trading strategy which involves the capitalization of small market moves by initiating a large number of trades in a short time (often 1 minute to 15 minutes). Given the low timeframe of these trades, it stands to reason that selecting currency pairs with small spreads is crucial; otherwise, clients are less likely to receive any reward after the trade is closed.
This is where zero spread accounts come into play. A trading account with no spreads may be a good choice if you wish to minimise trading costs. However, when trading in turbulent markets, where spreads usually widen, it’s essential to know if zero spreads are fixed or variable. You might also wish to check whether you need to pay an additional commission.
Pros of using a Zero Spread Account For Scalping
You need to be cost-conscious and keep your expenses minimal to be successful with a latency-based scalping strategy, and the zero-spread accounts can help you to do so.
Cons of using a Zero Spread Account For Scalping
Since scalpers undergo multiple trades, entry and exit fees can be higher when aggregated, rendering the trade outcome unfavourable.
How can you compare Zero (0) Spreads Forex Brokers?
Even though there is no spread when trading currencies, this does not indicate that there is no expense involved. However, you must consider several other factors as well when comparing zero-spread forex brokers.
Commissions Per Lot
Since the spread is one of the ways brokers generate income, they are likely to charge you a commission in the absence of spreads. Therefore, you should know any associated commission with zero spread trading. Mostly, it stays around $7 per lot ($100,000), though this might vary widely depending on the state of the market. Avoid selecting a broker with a high commission cost in place.
Spreads on Various Pairs (as not all of them start from 0)
Signing up with a broker offering zero spread means you can trade various currencies with spread starting from 0 pips. However, you should know that the spread for some currency pairs can shift depending on the volume and market volatility. Therefore, you need to watch your positions closely as these fluctuations could make your spreads skyrocket.
Brokers providing user-friendly trading platforms generally appear to be the preferred choice for both novice and skilled traders. Essentially, using a trading platform loaded with multiple trading tools and indicators can sometimes confuse you instead of building your confidence. Well-reputed brokers understand individual customer needs and provide their clients with various trading platforms, including proprietary trading apps and third-party trading terminals.
Regulation makes brokers exercise fair practices and act in clients’ best interests. In addition, regulated brokers ensure enough liquidity in collaboration with large financial institutions and banks to fill clients’ orders instantly. Some regulated brokers even offer indemnity insurance up to a specific limit, enabling clients to seek compensation against losses if the company goes bankrupt. Remember, regulations don’t guarantee the safety of your funds with the broker but offer you a sense of security. At least you have legal protection in case the broker misconducts.
You are likely to be concerned about the security of your investments. Check if your selected broker keeps your funds segregated from its capital and employs advanced security protocols such as SSL web encryption and two-step authentication to protect your confidential data. You might also want to check if the broker has ever been hacked.
Currency Pairs Offered
A broker with a rich product portfolio might be better than the intermediary offering a selected range of currency pairs. You already have fewer currency pairs to trade when using zero spread accounts, and the limited choice makes it difficult to trade your desired currency pair.
How to create an Account on a Zero Spread Forex Broker?
Signing up with a zero-spread forex broker is the same as opening an account with any other broker. Here is the step-by-step guide to help you know how to create an account on a zero-spread forex broker. We’ll use Pepperstone for illustration purposes.
- Visit the company’s official website and click the “Join Now” button to access the registration form.
- Click the blue highlighted button captioned as “Continue with email”. You can also use your existing Gmail or Facebook ID.
- Enter your details, including name, email, account type, and country of residence.
- Confirm your mobile number and nationality besides providing other details.
- Select your prefered account type, i-e, the ”Razor – Zero Spread” Account. You also need to choose a prefered trading platform, base currency, leverage size, and password for your account.
- Confirm your employment status, funding source, estimated annual income, the purpose of trading, and that you know the risk involved in CFD trading.
- Confirm your previous trading experience.
- Read the terms and conditions and sign off the declaration form.
- Complete the verification process and upload the supporting documents.
- Add funds to your account and start placing trades.
Note: In compliance with strict regulatory requirements, the broker asks you to verify your account before allowing you to add funds or place orders. You can use a copy of your ID card, Driving licence, or Passport for identity verification. A utility bill or bank statement copy will work fine for address confirmation.
Why Zero Spread Forex Brokers Need to be Regulated
Different brokers boast zero spreads these days. However, touting the best case scenario or the advertised lowest spread can be deceptive. Often, spreads stay higher during most of the day.
Therefore, you should not overlook the average spreads when determining whether or not a broker with a supposedly zero spread is actually providing a good deal.
Notably, spreads offered by most brokers are significantly larger than zero on average because of the need to pay a commission on each deal. A broker that advertises no spreads or commissions should be carefully scrutinised because they could be a fraud or engage in questionable execution techniques. Because of this, it’s crucial to only deal with reputable brokers who operate under strict rules and regulations.
Is Zero Spread Account Cheap?
Zero-spread accounts are known to be relatively cheaper. Most brokers provide their clients with the zero spread option in ECN accounts. With the ECN trade execution model, traders can directly access the market and manage their transactions more precisely. In addition, clients can boost their trading efficiency by benefiting from the execution speed. Another advantage of choosing zero-spread accounts is that they are transparent and don’t carry hidden charges.
However, you can’t say it with absolute assurance. Often, brokers incorporate trading fees into a commission charge you need to pay on every lot traded. As a result, the overall trading costs associated with a zero account may be greater than those associated with variable spread accounts.
Is Zero Spread Forex Broker Safe?
The majority of forex brokers offering zero spreads do so under offshore licences. Here is the point where investors need to give conscious thought. Some offshore brokers have been in business for over a decade and earned a respectable reputation. A safe zero spread broker must employ safety measures to protect clients’ confidential and financial data. It must keep clients’ investments in segregated bank accounts. Besides restricting possible intrusion through the firewall, SSL web encryption, and two-step authentication, it should also protect clients’ accounts against negative balance protection.
Moreover, the broker’s civil liability insurance coverage should enable clients to seek compensation against any financial losses up to a specific limit in case the broker goes bankrupt or faces liquidation issues. Most regulated brokerage firms that offer all these services include Pepperstone, Vantage Markets, Think Markets, etc.
On the other hand, some other substandard offshore brokers provide low-cost trading accounts such as zero spreads just to attract new traders. Therefore, before signing up with a zero-spread forex broker, you must consider all of the aforementioned factors concerning the brokers’ comparison to make an informed decision.
What Reddit & Quora Users Say About Zero Spreads Forex Brokers
The Reddit community doesn’t look much in favour of the zero spread accounts. Most clients on the network claimed that zero spread brokers tend to be market makers who do not pass your orders to liquidity providers but rather process them inside. Some Reddit users also suggested clients should go for standard accounts with ECN brokers. According to them, having small spreads with no commission is better than zero spreads coupled with hefty commission costs.
People hold a mix of opinions about zero-spread forex brokers on Quora. While some investors believe them to be a competitive choice for specific trading strategies such as scalping, others seem to doubt their integrity. Some users also accused the zero spread brokers of quoting different prices to clients. For example, they believe if a broker quotes the price of EUR/USD as 1.2600 to half of its customers and 1.2605 to the other half, it will still bring in an average of 5 pips from the transaction.
We also encountered several threads where people recommended clients opting for ECN accounts, arguing that prices never stay the same. According to them, despite a broker advertising a zero spread charging policy, its spreads will likely widen during volatile market conditions. So even if they do change, clients will still have tight spreads at their disposal.
The term “zero spread account” refers to trading accounts provided by brokers in which the difference (spread) between asking and bid price of an underlying instrument is either zero or very close to it. However, other trading expenses (such as commissions) may still be there and might even increase depending on your broker and account type.
Due to increased competition among forex brokers for clients like you, the trading cost seems to have declined over recent years. Brokers now offer trading accounts with zero spreads as an additional incentive.
However, some companies may use zero-spread terminology as a marketing tactic only to entice you to become a trader. Therefore, you must be extra vigilant when deciding which broker with zero spread accounts might suit you well. Moreover, it is essential to read the terms and conditions in detail and check out for any disclaimer.
This guide attempted to cover all aspects of zero-spread forex brokers, explaining all you need to know to select the most suitable platform to meet your requirements and how to open an account with a zero-spread forex broker.
Starting from what forex spreads are and how zero spread accounts work, followed by the pros and cons of using zero spread accounts, you must be aware of each element before opening a zero spread account. You should also have developed a thorough understanding of how to compare brokers offering zero-spread accounts and the difference between standard and zero-spread accounts, besides knowing their significance over each other after reading this guide.
Lastly, we’ve also compiled a list of frequently asked questions about zero-spread accounts to help you know most about them.
Q & A
Various brokers offer zero spread these days. However, based on our research, we narrowed our list to the top brokerage firms, including Pepperstone, Vantage Markets, and ThinkMarkets.
Based on our findings, the listed brokers offer the lowest spreads in 2022.
- Pepperstone – offers excellent educational resources, is the most trusted broker, and has the best pricing structure
- Think Markets- In terms of overall cost-effectiveness, it is your best bet
- Vantage Markets – Best web trading terminal and stable prices
A spread that is close to zero is considered to be the best. Brokers offering an average spread of less than 1 pip may be assumed to be the brokers with the best spreads. According to user experience and online resources, Pepperstone is one of the brokers that offers the best spreads in 2022.
We don’t recommend trading with a zero-spread forex broker, especially if you are new to CFD trading. Although brokers claim to offer zero spreads, they are less likely to keep them fixed at zero. Basically, you can’t expect brokers to serve you for free. Financial intermediaries advertise zero-spreads mostly to attract newbies and have a competitive edge over their competitors. However, they also need compensation. Therefore, these brokers charge you a commission per lot, which could sometimes exceed the total cost you would have incurred in a standard account with no commission.
Yes! In fact, zero spread accounts are considered to be more suited for scalpers. In the absence of spreads, scalpers might fearlessly trade as much as they wish. However, the cost to open and close multiple trades in a single day can exceed the target benefit.
No, having a zero spread account doesn’t mean you won’t incur any trading costs. You still need to bear the commission charges per lot. Non-trading costs like fees on deposits and withdrawals, account inactivity fees, and currency conversion fees also make part of the total trading cost.
It depends upon an individual’s trading preferences. Some traders may find zero spread accounts insufficient to fulfil their trading needs due to a lack of access to specific execution techniques or order types. Other traders might happily choose zero spread accounts for scalping and pay less attention to other variables.
No, zero spread brokers will certainly charge a commission. Since brokers mostly have two sources to receive compensation for their services. Either they charge their clients fixed or floating spreads or receive a commission from them on trading per lot.
Tradable assets are priced at their true market value in the Zero spread trading account. The spreads are typically very small or even negligible because of the absence of mark-ups on asset prices. However, there is a greater commission price per deal.
The broker adds a markup to the asset values listed in a standard trading account. It may have wider spreads, but the trade commissions are likely to be lower or even zero. Hence, we leave it to you to decide which account would suit you more.