There’s much confusion lately about the differences between strictly “spread” based Forex brokers and “commission” based Forex brokers and how to choose between them. In this post we’re going to sort through the differences to help you make more informed decisions, as well as explain how you can have access to both models from one broker account using our Expert Guide Custom Price Feeds.

But first, I want to be clear on what this post is NOT about.

The discussion in this post is NOT concerned with “Dealer Desk” type brokers who make money from the spread AND by taking the opposite side of your trade. Dealer desk brokers make money when you lose (can you say conflict of interest?)! I’m not suggesting that ALL dealer desk brokers are bad because they aren’t, just that the potential for conflict is there and should be noted.

The types of brokers we’re talking about in this post are ECN and Straight Through processing (STP) brokers who do NOT make money when you lose and therefore do not have a conflict of interest with the trader.

OK, back to the discussion …

The Liquidity Provider

Since there is no central marketplace for Forex each broker needs to connect with larger financial institutions around the world who are willing to process trades for them. The institutions, collectively known as the “interbank”, are the liquidity providers for the various retail brokers.

As liquidity providers they provide the retail brokers with real-time streaming quotes similar to what you get on your trading platform. This is the “raw” price feed the broker receives.

This raw price feed the broker receives contains what could be thought of as wholesale prices (spreads). These are lower than what you will see from any retail broker because the retail broker is leveraging their buying power that comes from the aggregate volume of trades they offer to their liquidity provider.

This is a typical wholesale vs retail relationship common throughout all business. Basically larger volume gets a better deal, or spread in this case.

Now the retail broker needs to make money so they offer the price feed to their retail clients who trade in smaller volumes. Of course in order for the retail broker to be able to do this they will incur expenses that need to be covered so they apply additional fees to the retail client. Again this is typical in all forms of business.

So for brokers, as a business, there’s a certain amount of fees they need to collect per transaction so they can stay in business. This amounts to your transaction cost per trade. Brokers typically do this in one of three ways

1. Spreads
2. Commission
3. Both Commissions & Spreads

Lets Look at each of the broker models above along with the implications for the trader.

Spread Based Fees

In a strictly spread based fee structure the broker takes the “raw” price feed they get from their liquidity provider and adds additional pips to the spread essentially widening the spread a bit.

When the retail trader makes a trade the retail broker skims off the additional pips they added to the spread as their transaction fee. The broker is makes their money money by incorporating their transaction processing fees into the spread.

The misconception that there are no commission fees when trading Forex is just that, a misconception. Under this model the commissions are simply incorporated into the spread. This is by far the most common retail broker model.

Commission Based Fees

Some brokers, instead of adding their transaction fees into the spread, will offer their retail clients the same “raw” price feed they get from their liquidity provider, but will add on an additional separate commission per transaction. This is similar to what a stock broker does.

It’s common for the commission to be stated in pips. For instance a commission based broker might offer a EURGBP spread of 2.2 pips (their raw spread) and a commission of 2 pips. So although your spread is only 2.2 pips your total cost for the trade is still 4.2 pips.

Commission & Spread Based Fees

Some brokers choose to extract their fees using a combination of both methods. They will widen the spread a little and add a smaller commission.

However, because you don’t really know what the broker is getting from their liquidity provider it’s near impossible to tell if you’re broker is extracting their fees based entirely on commission or a combination of spread and commission.

The reality is it doesn’t really matter as long as you are happy with the spreads and commissions and they are working for you.

Which is Better?

With brokers offering a commission based price feed you generally get lower spreads. However, this does not mean that your cost per trade is lower because you have to add the cost of the commission.

Traders just starting out in Forex often overlook this. They see the spreads from two different brokers and see a big difference in the spreads without realizing considering the fact that one of the brokers is charging a commission on top of the spread while the other broker is not.

Unfortunately some brokers do not make it obvious on their home page that there is a commission, and just what that commission is, so it’s easy to overlook.

However, when you factor the commission back into the trade for the most part the actual cost to you per trade is often quite similar between the two models.

The real difference is that for some trading systems that are sensitive to spreads a commission based broker offering lower spreads may cause the trading system to trigger more trades providing more trading opportunities.

However, this doesn’t necessarily mean the trades will win more often. The lower spread may cause more trades placed but remember, if the trade WINS and makes you $2.50 but your commissions $3.25 then it’s not really a winning trade.

The Expert Guide Custom Price Feed

So again which transaction fee model is better?

The reality is that sometimes different trading systems can respond to better or worse with different transaction models and the best way to find out is to try each one.

Unfortunately having multiple brokers divides your funds up, adds more paperwork, and is generally a pain in the ass by anyone’s standards.

This problem is about to go away forever.

The current Expert Guide Custom Price Feed which offers excellent spreads, great trade execution and FREE VPS, is about to be joined by a second custom price feed option that is commission based.

Using our large membership volume we’ve been able to negotiate BOTH of these custom price feeds through the same broker which means you’ll be able to switch between the two price feed models with a simple email request to the broker.

If one model isn’t working well for your trading system you can switch to the other model with a simple email request. No extra paperwork, no new accounts to open, no new funding issues.

It will be easy to switch back and forth, or even have an account for each type.

The current spread based custom price feed is available now (and has been for a number of months).

We’re currently working out the final details of the commission structure and expect the new commission based feed to be available any day now so please keep an eye on this blog and your email for final details.

You can learn more about our broker relationship along with our existing custom price feed here

The Expert Guide Custom Price Feed

*Note: you can open an account now with the current custom price feed and when the commission based feed is finalized you’ll be able to switch over with a simple email request to the broker.