What is Fixed Spread?
As it may be assumed from the name, fixed spread does not change depending on time or general market fluctuations and volatility. However, in case of low liquidity and high volatility the spread may temporarily be changed, i.e. be transferred to the new fixed spread level; when the market returns to its normal condition the spread is changed back to its general level. However, despite these rare situations trading with fixed spread is more convenient and beneficial for clients, as it is more predictable, thus less risky.
In recent years in conditions of high competition, brokerage companies are constantly trying to offer their clients innovations, and this refers to spread as well. Increasing number of companies are adopting floating spread.
What is Floating Spread?
Floating spread on Forex and CFD markets is a constantly changing value between Ask and Bid prices. Floating spread is a completely market phenomenon and, most of all, interbank relations are characterized by it. Thus, along with the usual trading accounts with floating spread, a number of companies offer clients so-called ECN accounts (Electronic Communication Network). ECN Forex broker provides a platform where participants (banks, market makers and private investors) trade with each other, by placing buy and sell orders in the system. As usual, clients have lower spread trading on the ECN platform, but, at the same time, they pay commission to the broker during their operation
Fixed Spread Vs. Floating Spread
The main difference between fixed and variable (floating) spreads is that a fixed spread remains unchanged even during high volatility while a variable spread (floating spread) fluctuates in a range. Variable spreads can drastically increase during trading news and high volatility.
The floating spread keeps changing between the ask and bid prices of an asset. For example, if you buy a currency pair, things like its demand and supply would impact its rate. So, the price you pay to cover such a cost is called a spread.
Generally, brokers provide tight spreads, which are also called variable spreads. Though many times, what you pay is too different from what you were offered initially. Spreads act tight during the active trading sessions and high liquidity cases. You can take examples of the London-New York overlap here.
Floating spreads are also referred to as a “completely market phenomenon.”
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