The concept of having your Forex spread fixed versus variable or floating is pretty simple, at least on the face of it. In fixed you get the same charge for each position that you open every time, as the spread fees are fixed. For floating, the spread charges are not fixed; they vary at different times depending on the volatility in the market and the instrument being traded. Floating spreads are less costly under normal market conditions, but will become more expensive at times of high volatility.
The spreads charged to clients are often a reflection of the model that the broker is using, where the costs are passed on to the trader. Costs are incurred primarily by the feed provider, plus the dealing desk infrastructure which includes insurance, risk management fees, etc. But, it is also the method by which the broker traditionally takes their profit, making a small markup on every trade placed by the trader. Therefore, it’s certainly worthwhile for traders to shop around, as there can be significant variations between the offerings of different companies depending on the underlying model.
The good news is that the advent of non-dealing desk models has lowered the cost for brokers, and this has been reflected in the low-cost spread options that have been available on the market in the last few years. The taking of a spread relies on the profitability of other activities, which are heavily weighted on risk management and commissions – activities that are more high risk than a pay per use system like the cost of the spread.
The determination of whether you are better off taking a variable of fixed spread ultimately comes down to your trading technique of when and what you trade. If you are likely to trade during high volatility periods, then floating spreads will be higher than fixed and therefore less attractive. If the opposite is true, then floating is likely to be the more attractive option.
In theory, the easiest way to determine which is better for you is to review your trading technique and historical activities. However, in reality, it can be difficult to identify what the impact would be if you:
- Trade in a moderately volatile market – would the floating spreads increase beyond the fixed spreads at this point or would it stay below?
- What the impact would be of closing positions during a volatile period?
- What would be the impact of the market spread?
Sometimes even fixed spread options are subject to change. The market spread is the spread that is found on the actual market during high volatility periods (making it difficult to profit simply from volatility and thus enabling the market to return to normal levels of volatility as soon as possible). During normal market conditions, the market spread is zero, and so will not impact total costs, but in a volatile market, it will be added on. The net effect being that the fixed spread trader will be paying his usual fixed spread plus an extra market spread.
Another factor which impacts the decision is the associated conditions with choosing a fixed or variable spread. Sometimes you will not have access to bonuses for a particular type of trading (usually floating), there could be fewer instruments available or limitations to trade with a particular option. This will impact your ability to trade and must be taken into account.
So, while the simple cost per position is the critical factor, determining the impact is no simple activity. However, it is often possible to negotiate on some of the spread conditions. If something is crucial, speak to your account manager and see what they can do.