Brokers that are offering retail forex trading services have, over time, competed to such an extent on the spread prices that those prices are so tight as to be unable to be a point of competition that brokers can afford. Particularly in the Australian and UK markets, the headline spread for most major currency pairs, such as the EUR/USD spread, is much less useful as a differentiator for traders than it used to be. This is because most spreads have reached such low levels that brokers cannot really compete by offering any lower.
This, of course, doesn’t mean that brokers have stopped competing with each other, just that the battlefield has shifted. Modern forex brokers are now focusing on two areas where they can inject a notable amount of differentiation into their services for traders who are shopping around: the quality of their executions and the commission that they ask for on forex trades. These new competitive battlefields are highlighted by comparison websites like Compare Forex Brokers, where traders searching for ASIC regulated brokers or FCA regulated brokers can find detailed breakdowns of how different brokers are competing in the services they offer.
Let’s look a little closer at the different ways that modern forex brokers are choosing to try and compete with each other, and at why spreads are no longer the main point of differentiation.
The Rising Popularity of Raw Spread Accounts Are Changing The Game
The idea behind a raw spread account is that the market spread and the broker’s commission are displayed separately. While that might mean that traders need to do more to fully calculate the costs and gains of their trades, it allows them to compare prices between brokers much more easily, because they can always see exactly how much the spread is, and what the commission price is.
Interestingly, for traders who are unobservant, the existence of the raw spread account can throw a wrench into their calculations. If a trader is only looking at how low the spread is as a point of differentiation, then they could easily fall into the trap of signing on with a broker that offers a low spread but has a high commission paired with it.
Forex Commission As A Point of Competition
Now that most brokers have reduced their spread levels about as low as they possibly can without losing profit, there isn’t really much room for most brokers to change these numbers in a way significant enough to attract customers. This is why forex commission is now one of the important battlefields on comparison sites like compareforexbrokers.co.uk, because those are numbers that brokers can change in significant ways.
But, just like when traders are attempting to evaluate the value of low spreads, forex commission should not be viewed in a vacuum. Traders should examine both spread and commission and focus on the entire cost of making a trade, not solely the spread or commission.
The EUR/USD Spread Is Still Important
While the EUR/USD spread is no longer the main battlefield that brokers are competing on, it is still a useful benchmark for comparing brokers. It is by far one of the most commonly and actively traded currency pairs across the globe, and this high level of liquidity means that it is usually the currency pair with the most competitive pricing.
This can allow traders to see if a broker is working to be competitive by comparing their EUR/USD spread to other brokers’. This is especially true when the market is particularly volatile due to inflation or other factors, as maintaining competitive pricing while the market fluctuates is the strongest indicator of competitiveness a broker is likely to show.
Comparing With All-In Trading Cost
We know that comparing based solely on the spread or commission isn’t wise; instead, traders should try to calculate the all-in trading cost. This involves bringing together all the different costs that a trade might incur, giving a more accurate cost of that trade.
One of the advantages of this approach is that it makes it clear why there is no single best method for determining the cheapest type of account that a broker offers. High-volume traders are going to get much better value out of low forex commission accounts, while more casual traders aren’t going to feel the sting of high commission brokers, as long as the spread is favourable.
Instead of focusing on any one specific metric, traders should calculate the all-in trading cost for their typical trading behaviour on brokers they are thinking about using, and let that calculation help point the way towards true value.
Differentiation By Execution Quality
Some brokers are able to differentiate themselves in the market by providing a higher level of execution quality for trades. This can include everything from the speed that an order hits the market, to how consistently orders are rejected, slippage occurs, or fills are required, as well as the difference between the price that traders receive vs what was displayed when an order is submitted.
Brokers with a higher level of execution quality are going to build a strong sense of customer loyalty, and as long as they compete reasonably along other metrics, might be favoured over brokers with shoddier execution quality.
This article was written by IL Contributors at investinglive.com.