One of the key factors traders consider when choosing a broker is the spread, which is the difference between the buying and selling price of a currency pair. The belief that all brokers offer the same spreads is common, but in reality, the spreads offered by brokers can vary significantly based on several factors, including their business model, the type of account you have, and the liquidity providers they use.

While some brokers may offer tight or fixed spreads, others may provide variable spreads that fluctuate based on market conditions. In addition, the spread is just one component of a broker’s overall trading costs, and it’s important to consider other factors such as commissions, slippage, and execution speed. The type of broker you choose, such as whether they are a market maker, ECN, or STP broker, can also significantly impact the spreads they offer.

Why Some Traders Believe All Brokers Offer the Same Spreads

Several factors contribute to the belief that all brokers offer the same spreads:

• Standardisation of spreads: Many new traders assume that spreads are standard across all brokers because they are often advertised in a similar way. Brokers will often promote their spreads as one of their key selling points, especially when they are targeting retail traders.
• Comparison websites: Some comparison websites list brokers with their average spreads across different currency pairs. However, these websites often standardise the spread data to provide an easy comparison, which can give the impression that all brokers offer the same spreads, even though the actual spreads can differ based on account types and market conditions.
• The concept of “average spreads”: Many brokers advertise an average spread, which is the typical spread you might see during normal market conditions. However, this does not take into account times of high volatility or low liquidity, when spreads may widen significantly. Traders may mistakenly assume that all brokers offer the same average spread, even though the actual spreads can vary widely in different market conditions.

Why Brokers Offer Different Spreads

Brokers do not offer the same spreads, and there are several reasons for this:

1. Type of Broker

The type of broker you trade with plays a significant role in determining the spreads they offer. There are two main types of brokers: market makers and ECN/STP brokers.

• Market Makers: Market maker brokers typically offer fixed spreads or slightly wider variable spreads. In this model, the broker acts as the counterparty to your trade, and they make money from the spread as well as from your losing positions. These brokers may widen spreads during times of volatility or market uncertainty to protect themselves from risk, leading to higher costs for traders.
• ECN (Electronic Communication Network) and STP (Straight Through Processing) Brokers: ECN/STP brokers offer variable spreads that are typically narrower than market makers. These brokers route trades directly to liquidity providers, meaning they do not take the opposite side of the trade. They make money by charging a commission or a small markup on the spread. The spread with an ECN/STP broker can fluctuate with market conditions, but it is generally tighter during periods of high liquidity.

2. Liquidity Providers

The liquidity providers a broker uses also influence the spreads they offer. Brokers that offer ECN or STP accounts typically connect directly to multiple liquidity providers, such as large banks and financial institutions, which allows them to offer narrower spreads during times of high liquidity. In contrast, market makers often have more limited access to liquidity providers and may widen their spreads during periods of low liquidity to protect themselves from sudden market moves.

• Tighter spreads: ECN/STP brokers benefit from direct access to liquidity providers, so they can offer tight spreads, especially in liquid currency pairs like EUR/USD or GBP/USD.
• Wider spreads: Market makers, who provide liquidity themselves, may offer wider spreads, especially during volatile times, as they act as the counterparty to trades and need to protect themselves from risk.

3. Account Types

Many brokers offer different account types, and the spreads can vary depending on the type of account you choose. Here are some examples:

• Standard accounts: These accounts typically have wider spreads, especially if they are offered by market maker brokers. Traders in standard accounts often don’t pay commissions but are instead charged a wider spread.
• ECN/STP accounts: These accounts often have lower spreads, but traders may be charged a commission per trade. While the spreads are tighter, the overall cost of trading can be higher due to commissions.
• VIP/Professional accounts: Some brokers offer VIP or professional accounts to high-volume traders, which can come with discounted spreads or even zero spreads in some cases. These accounts are often available to traders who meet specific criteria, such as a higher minimum deposit or a certain trading volume.

4. Market Conditions and Volatility

Market conditions play a significant role in the spread. During times of high volatility, such as during economic news releases or geopolitical events, spreads can widen significantly, regardless of the type of broker you use. Even ECN brokers may experience wider spreads during these periods due to fluctuations in market liquidity.

• Narrow spreads during calm markets: During stable market conditions, brokers who have access to high liquidity can offer tighter spreads.
• Wider spreads during news events: High-impact news releases (such as NFP or central bank decisions) can cause spikes in volatility, leading to wider spreads across all brokers.

5. Market Making vs. Non-Market Making Brokers

While market makers typically offer fixed spreads, brokers that operate on an ECN/STP model provide variable spreads. The spreads on ECN/STP accounts are generally narrower than those of market makers, but they fluctuate with market conditions.

• Market makers often profit from traders losing money, and their spreads tend to be wider as a result. They may widen their spreads during periods of volatility or when liquidity is lower.
• ECN/STP brokers make money by charging commissions or small markups on tight spreads, and their spreads reflect the underlying market conditions, such as the liquidity available from liquidity providers.

How to Compare Brokers and Their Spreads

To compare brokers and their spreads effectively, consider the following:

1. Account type: Look for an account type that aligns with your trading strategy. ECN or STP accounts generally offer tighter spreads but may charge commissions, while standard accounts tend to have wider spreads but no commission.
2. Market conditions: Be aware that spreads can widen during periods of high volatility, such as during economic events or times of low liquidity. Make sure you check the spread under different market conditions to understand how it behaves.
3. Commissions: Brokers that offer tight spreads might also charge commissions. It’s important to consider both the spread and commission to determine the overall cost of trading.
4. Transparency: Choose a broker that is transparent about their spread structure and commissions. Avoid brokers who hide their fees or have complex pricing models.
5. Regulation and reputation: Ensure that the broker is regulated by a reputable financial authority, as this provides some assurance that the broker is following ethical practices and not manipulating spreads.

Conclusion

It is not true that all brokers offer the same spreads. The spreads offered by brokers can vary widely depending on factors such as the broker’s business model, the type of account you use, the liquidity providers they have access to, and the current market conditions. ECN/STP brokers typically offer narrower spreads than market makers, but the spread structure also depends on the broker’s pricing model and commissions.

When choosing a broker, it’s important to look beyond just the spread and consider factors like account types, commissions, liquidity, and regulation to ensure you are getting the best value for your trading style.

To learn more about how to choose the right broker and optimise your trading strategy, enrol in our expertly designed Trading Courses today.