Why?

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niva
210
niva  

Why the euro/dollar pair has the lowest spread? Can anyone make it reasonable?

HoggZilla
44
HoggZilla  
niva:
Why the euro/dollar pair has the lowest spread? Can anyone make it reasonable?

I am not a broker nor a "true" expert but this is what I understand. Spread is based on liquidity and volume. A legitimate broker is just trying to make a reasonable commission on your trades. Because the spread is higher does not mean they are trying to make more commission on that pair. Rather the goal of the broker is to make a certain consistent commission, over time, on every trade. The most important factors in determining the spread they offer is liquidity and volume.

Liquidity:

When we trade with a typical forex broker they immediately take our position without really filling the position in the market. For the trade to hit the market someone has to take the other side. With the eur/usd it is easier to find a "taker" than with other pairs so a broker can usually move the position at the current price.

Example. If you buy the euro long at 1.2805 your broker could usually get that position filled in the market at a slightly better price, say 1.2804. So immediately the broker made a commission - 1 pip. Over time, your broker will average this commission. Sometimes they might get a little more, sometimes less. Sometimes they might even lose, but over time it averages out.

But let's say you buy the gbp/jpy at 211.20, your broker still aims for their 1 pip commission over time, but because the liquidity is less with this pair it is typically more difficult to find a "taker" in the market. So sometimes your broker might make 5 pips by offsetting your position in the market at 211.15 and sometimes they might lose 5 pips and get your order covered at 211.25, but over a period of time they strive to average 1 pip commission.

Volume:

Trading forex is much more like stocks than your broker makes it seem. A "lot" of a currency is traded like a "share". An interbank lot being 1,000,000 I believe. So if your broker needs to hedge (offset) your position in the market they likely need to pool your order with other traders orders. If you only trade 100K then your broker would accept your order but wait until enough other traders opened positions so they have a full 1000K (1 interbank lot) to open an offset order in the market. Again, prices change so they strive for their normal commission. With lower spread currencies the volume is typically greater and thus easier and quicker to pool full interbank lots.

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