Beginner Question: Spreads

Discussion in 'Forex Brokers' started by DannyBens, May 9, 2005.

  1. Hello,

    I understand that forex brokers are not charging commissions or monthly fees, since they make their living off of the "spreads".

    Can someone explain how does this work, or point me to an explanation? What does "a spread of 3 pips on USDJPY" mean and how is the broker earning from this?

    Thanks in advance.
  2. MTE


    It is the bid-ask spread. That is, whenever you want to buy you buy at the ask price and whenever you want to sell you sell at the bid price. So the brokers/dealers always buy at the bid (lower price) and sell at the ask (higher price). That's how they make money.

    A spread of 3 pips mean that an ask is always higher than the bid by 3 pips. E.g. EUR/USD 1.2987 bid - 1.2990 ask.
  3. Understood.

    Thank you MTE for the quick one.
  4. liri


  5. MTE


  6. This makes me wonder if I should ask "wow wow wow... what details?"....
  7. MTE


    Don't worry too much about the details of how FX dealers make money. Obviously, it's not as easy as buying on the bid and selling on the ask, as the market can go against you. So they either have to hedge their positions, i.e. balance out their net position so that they don't have to worry about the direction of the market or take on directional risk and "hope" that the market goes in their favor. That's what liri was saying in his/her post, but they do have an edge in being able to buy at the bid and sell at the ask.
  8. I see.
    What were you thinkinking hiding the details from the new guy?!... :)

    Thanks for clearing this, I guess I should not worry then - as long as there are no commissions, I am good (or at least "better" than in the equity market)
  9. MTE


    I'm no expert in FX brokers, but you should read some of the threads here, the impression that I got is that some FX brokers are real crooks, who manipulate things against you.

    For example,

    Sometimes paying commissions is not a bad thing at all.
  10. Thanks for the reference MTE. Indeed an interesting read.

    Where there is money, there are thieves... but I was surprised to see they talk about Refco, which I assumed is a respectable instituation.

    Well, back to the hunt.
    #10     May 10, 2005