A quick guide to spreads
Author: Ivan Egorov
Spread is the difference between the Bid and Ask prices.
Spreads are an inevitable part of the trading process, and some people think of them as another commission type. Spreads tend to be wider when markets are slow and tighter when markets are active.
Spreads are not necessarily bad, but they have to be managed and kept under control so that trading remains worthwhile.
Spreads: fixed and floating
There are two types of spreads that brokers can work with, referred to as floating spreads and fixed spreads.
Floating spreads are considered high-risk because they fluctuate depending on market trends. It means that they can increase quickly and substantially, which would make the final execution price higher and less profitable. Floating spreads are less risky when the markets are quiet and there are no dramatic price changes every few minutes.
Fixed spreads don't fluctuate, but they can be adjusted in high volatility periods. They are typically used for medium and long-term trading, whereas floating spreads are popular in day trading. Fixed spreads might not be as profitable, but they make the trading process more predictable, which is a benefit for many traders.
How a liquidity bridge helps manage spreads
Like many other brokerage-related things, a good liquidity bridge can also help with spreads. Here is how Trade Processor (TP), a flagship liquidity gateway by Tools for Brokers, does it:
- TP offers a variety of trustworthy liquidity providers (LPs) for brokers to choose from. A good selection of LPs ensures you can execute your orders fast and with tighter spreads.
- There are six different aggregation methods in the bridge that help get the best price for each unique situation.
- Spreads can be controlled through feed settings by defining the minimum and maximum thresholds. The system will adjust the spreads dynamically and keep them within the set limits.
- The LP performance tab in the bridge provides brokers with extensive spread statistics for every minute in the past to analyse the quality of the price feed and compare their LPs.
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