Direct from the desk of Dane Williams.
In the simplest terms, not all forex brokers are able to offer fixed spreads.
You see, just like forex brokers offering negative balance protection, fixed spreads aren’t exactly what they seem on the surface.
They sound fantastic in marketing material, sure.
But the reality of offering fixed spreads is that your forex broker has to be a market maker that trades against you.
Not so fantastic when you put it like that, huh…
So, let’s dig a little deeper into how forex brokers are able to offer fixed spreads.
As I mentioned above, the key thing to understand is that for a broker to offer fixed spreads, they MUST adopt the role of a market maker.
This means that they become the counterparty to your trades, rather than making money on just the spread by passing them to liquidity providers in the interbank market.
There’s no denying that at first glance, fixed spreads seem like an irresistible offer.
You’re thinking since you always know the exact cost of each trade, regardless of market conditions, that they’ll provide you with a sense of stability.
Predictability is an alluring concept when offered to someone dealing in the most unpredictable of industries.
However, the reality of fixed spreads is much more nuanced.
When a forex broker offers fixed spreads, it means they are entirely setting their own prices for the currency pairs seen on their trading platform.
It doesn’t matter what is happening within the interbank market and as such, these prices in no way reflect true market conditions.
In essence, the broker creates a controlled environment within their platform, where they determine the bid and ask prices.
I often describe what you see on a market maker’s trading platform as an overlay placed on top of the real market.
Prices are close, but with full control, they’re able to subtly manipulate things to ensure they maximise their profits on any given swing.
These prices certainly deviate from the actual prices in the underlying interbank market.
Now here's where the real catch comes in.
As your broker acts as the counterparty to your trades, they also have a vested interest in your trading outcomes.
If you make a profit, it's a loss for the broker…
Yet if you incur losses, the broker profits!
Big red flag areas.
In the world of market makers, there are always ways to further maximise their earnings.
On top of fixing their spreads, market maker forex brokers also have the ability to introduce elements like slippage and requotes.
These practices can affect the precise entry and exit points you expect and completely make the positives of trading on fixed spreads mute.
So, as I wrap up, while fixed spreads may seem like an attractive proposition, it's essential you fully grasp the underlying dynamics at play here.
When a forex broker offers fixed spreads, they are 100% market makers, which can and always does lead to conflicts of interest.
Traders should carefully weigh the pros and cons of fixed spreads versus variable spreads, which are typically associated with ECN brokers.
Always make sure you and your forex broker’s interests are aligned.
If they’re offering fixed spreads, the reality is that they just aren’t.
Best of probabilities to you.