Spreads
Question: What are your spreads on spot pairs, forwards, options, and swap rates?
Why this Matters:
On spreads:
This is one of the most hotly debated areas among clients and brokers. As a rule, all parties overweight spreads in any discussion. Brokers overweight them in their pitches and marketing materials, and prospective customers overweight them in their choice of a broker.
One does not know the quality of the spreads one is getting, the liquidity (size) available on those spreads, the consistency of the spreads, or the actual spreads themselves until one trades LIVE with a broker or bank.
To truly analyze spreads, open more than one live account and observe spreads during all market conditions over at least one month.
Then begin trading in small size, and eventually increase size to ensure that the quality of execution and the liquidity available is adequate for your trading needs.
The market environment has changed drastically thanks to traders' intense scrutiny of spreads. This means that a firm can attract clients by offering seemingly razor-thin spreads, without any scrutiny of other factors that matter more. Witness Crown Forex (http://www.crownforex.com) and Dukascopy (http://www.dukascopy.com/) both of whom are relatively new entrants to the market yet offer spreads as low as .5 pips, with several hundred million of apparent liquidity the case of Dukascopy.
How is this possible? Is it plausible? One cannot know until one witnesses their spreads in a funded account during diverse market conditions, and eventually trades increasingly large size on those spreads, again across diverse conditions.
On swap rates:
There are a few different ways that brokers and banks account for the interest they charge on positions held long-term or rolled over to the next trading day. Without going into a detailed explanation, suffice it to say that the main factor is the spread between the bid and the ask (just like in the currency pairs themselves). If your broker charges $6.00 per night for you to hold a trade open, and pays you $5.00 per night on the exact opposite trade, then the spread is 20%. $1 / $5 = .2 or 20%. If your broker charges you 7.00% to hold a position, and pays you 5.50% to hold the opposite trade, the spread is 27%. 1.50% / 5.50% = .2727 or 27.3% rounded.
While it is difficult to make a true apples-to-apples comparison in this area, the better brokers provide up-front information on how much their swap rates are marked up relative to inter-bank levels.