Question about Fixed Spread VS Commission

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bgable
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Postby bgable » Wed Nov 01, 2006 10:52 pm

I think this guy just wants to argue for the sake of it. You might as well let him think he's doing better with a fixed broker and let him lose his ass because if he's this stubborn in his trading, he probably just comes on here to vent after losses day after day.

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Postby 4x=0 » Wed Nov 01, 2006 10:59 pm

Yes you're right Mr. 2 posts. I am having fun with this because nobody says anything with any validty. But I don't use a fixed-spread broker. Not any more. Thanks for playing !

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Postby Gert Frobe » Wed Nov 01, 2006 11:09 pm

put in a limit lower than the ask. ie in your loonie ask is @ 1.1228 so put in a limit order @1.1227 (it will get filled faster than the people wanting to sell @ 1.1228) when your ready to cover put in a limit order higher than the bid. if the spread is to high make your own bid and ask between them if its to freaking large of a spread. with EFX you can place you own
(limit) orders were you want them. you dont have to buy or sell at the market and your order will probly get filled.

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Postby jhtumblin » Thu Nov 02, 2006 7:29 am

The only reason for my continued posting is because this is a valid question and it needs to be clear to any newcomers. I personally don't care which broker everyone else uses because I have traded with both a fixed spread broker (Gain capital) and a commissioned brokerage (EFX Group) and KNOW which is cheaper.

I think there is a misunderstanding of how fixed spread brokerages work. Let me describe this longhand so it is clear for everyone. First is the terminology:

Floating Bid - The real buyer's price quoted by the banks

Floating Ask - The real seller's price quoted by the banks

Floating Spread - The difference in pips quoted by the banks between the floating ask and the floating bid. This is also known as the Actual spread.

Fixed Spread - The difference in pips quoted by fixed-spread brokerages which is calculated as:

Fixed Spread for longs = (floating ask + n) - (floating bid)
Fixed Spread for shorts = (floating ask ) - (floating bid - n)
where n = the number of pips of the stated fixed spread
==================
So now I will take your example of the USD/CAD and show you what a fixed spread brokerage calculates and shows you and how much you are really spending to come out ahead vs a comissioned brokerage.

The Floating Spread aka the Actual spread on the USD/CAD shortsell is:
Floating Bid: 1.1218
Floating Ask: 1.1228

Floating Spread = 1.228 - 1.1218
10 pips is the Floating Spread.
---------------------------------
Fixed Spread for the USD/CAD shortsell is:
Floating Bid: 1.1218
Floating Ask: 1.1228
Fixed Spread n = 3

Fixed Spread = (1.1228) - (1.1218 - 0.0003)
13 pips is the Fixed Spread.
---------------------------------

Ok you're gonna say that doesn't make sense because that's not what my fixed spread brokerage shows on my screen. Well that's because THEY DON'T WANT YOU TO SEE IT!

See, with a fixed spread broker when you subtract the n from the Floating Bid or add the n to the Floating Ask, it is no longer floating, it is fixed, the bid (for shorts) or the ask (for longs) MUST go in your direction by that number of pips just to break even.

Using a commissioned brokerage, the floating spread can actually close. Either the Floating Bid and/or the Floating Ask can move in your favor to make up the difference because you only need the equivalent of 2 pips to be in the profit column, no matter which side moves.

In this example if you are short using a fixed spread brokerage and the floating ask changes from 1.1228 to 1.1218 while the now "fixed" bid doesn't move, you are still down 3 pips. However if you were on comission then you have already cut your "false" deficit, and are only 2 pips from profit.

Now let's imagine that both the bid and the ask have moved up 3 pips each from the previous point. Bid = 1.1212 Ask = 1.1215. Are you making money yet over there with your fixed spread brokerage? Just broke even eh? I didn't think so...However suddenly mr commission brokerage client is up 1 pip and probably more.
---------------------------------

Finally the last leg.

You say, "Enough imagining. What if the bid and the ask rise at exactly the same pace? Then, surely a fixed spread brokerage is better right?"

I respond, "Please tell me you're not asking this question...When is the last time you saw the price of ANYTHING go up if traders are not bidding the price up, and when is the last time you saw ANYTHING go down if traders are not asking lower prices?"

The bid WILL ALWAYS close in on the ask to push prices up and the ask WILL ALWAYS go lower to the bid so prices will go down. That is the way the markets work. If you don't know that I would suggest more study before you start trading. If you place an order while the spread is wide, during a low volatility time, don't worry, it's only temporary, the spread must eventually be 1 pip but remember that doesn't necessarily mean one pip in your favor.
----------------------------------

Here our journey ends. I hope this was clear enough for everyone. If you want to ask me a question about this then please PM me, I am done explaining this concept. This can NOT be debated any longer, the reality of the matter is above. However, if you know of any lower comission brokers than EFX/MBTrading then that would interest me!

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Postby Gert Frobe » Thu Nov 02, 2006 2:15 pm

hotspot fx 3.00 per 100k BCU.

downside to hots only has 50x levrage., 7500.00 to open the account, only100k lot size, and the worst is (damm the man) when you have over 10M in your account they role back the levrage to 33 1/3 .

i ran the hots and efx side by side for a few week its the same and hots is better around the roolover time. exf gets kinda weard during this time w/ some bigass spreads.

ben

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Postby Nicholishen » Sun Nov 12, 2006 7:27 am

How do you explain the exorbitant rollover rates of EFX as compared to 'fixed spread brokers'? When you place limit orders, how do you know what the spread is at the point of execution? Under what circumstances is trading with an ECN better than a bucket shop?

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Postby 4x=0 » Sun Nov 12, 2006 10:27 pm

jhtumblin that was a great explination. Thank you for your time and effort with that. It looks like we agree after all, as I have also said, if the floating spread closes while in the trade, you may not have to pay a spread.

However, one debatable point of this thread is: whether to add the spread to your commission when calculating total cost of a trade with a non-fixed broker. I don't know if you considered touching on this point, which was actually discussed between TRO and KRESLIK here http://kreslik.com/forums/viewtopic.php ... c&start=30

The answer, as MK demonstrated is that you would add any floating spread costs to the commission.

The other point of this thread is which type of broker has a lower cost per trade. Initially I had claimed that the fixed spread broker appeared to have a lower cost. But the numbers I was using to calculate my commission were wrong. The number I used was an accumulated commission. So in the end, the fixed spread broker has a higher cost per trade on average. However, taking the loonie trade above with a fixed-spread broker would have been cheaper because with the variable-spread broker, the spread was 10 pips.

I don't agree with your allegation that

Fixed Spread = (1.1228) - (1.1218 - 0.0003)
13 pips is the Fixed Spread.
---------------------------------

Ok you're gonna say that doesn't make sense because that's not what my fixed spread brokerage shows on my screen. Well that's because THEY DON'T WANT YOU TO SEE IT!


If my fixed-spread broker slipped in an extra 10 pips spread, I think I would notice.

SUMMERY:

1) Variable-spread brokers are cheaper on average per trade UNLESS THE SPREAD IS LARGER THAN THE COMPARATIVE FIXED BROKER.

2) When calculating the cost of your variable-spread trade, combine the commission costs with any variable spread costs. Hopefully it is a tiny spread.

3) When fixed-spread brokers claim a 3 pip spread. It is not a secret 13 pip spread that they don't want you to know about.

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Postby 4x=0 » Sun Nov 12, 2006 10:33 pm

Nicholishen wrote:How do you explain the exorbitant rollover rates of EFX as compared to 'fixed spread brokers'? When you place limit orders, how do you know what the spread is at the point of execution? Under what circumstances is trading with an ECN better than a bucket shop?


I can't explain the rollover rates of EFX, but I know they are a natural occurance and they don't last for very long. You would only know what the spread is at your execution if you were at your PC to make sure. Otherwise, the rollover rates could tag your limit order, and then snap back into place. The circumstances that credit using an ECN versus fixed, are those where the ECN spread is smaller than the fixed broker, which is quite often. Excluding the rollover period.

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Postby jhtumblin » Mon Nov 13, 2006 6:23 am


I don't agree with your allegation that

Quote: ‹ Select › ‹ Expand ›
Fixed Spread = (1.1228) - (1.1218 - 0.0003)
13 pips is the Fixed Spread.
---------------------------------

Ok you're gonna say that doesn't make sense because that's not what my fixed spread brokerage shows on my screen. Well that's because THEY DON'T WANT YOU TO SEE IT!


If my fixed-spread broker slipped in an extra 10 pips spread, I think I would notice.

SUMMERY:

1) Variable-spread brokers are cheaper on average per trade UNLESS THE SPREAD IS LARGER THAN THE COMPARATIVE FIXED BROKER.

2) When calculating the cost of your variable-spread trade, combine the commission costs with any variable spread costs. Hopefully it is a tiny spread.

3) When fixed-spread brokers claim a 3 pip spread. It is not a secret 13 pip spread that they don't want you to know about.



1) Comissioned brokerages are always cheaper UNLESS you can find a fixed spread broker with a spread LESS than the commission costs AT ALL TIMES. (There is no such thing in existance at the time of this writing, not for retail clients anyway.)

2) You can look at it this way if you want to, I used to also, but the difference is that with a fixed spread brokerage, the brokerage POCKETS the spread which is not in the customer's favor. However, if you used a commission only brokerage without a deal desk, the brokerage makes NOTHING off the spread therefore it doesn't exist unless YOU choose to accept a deal at the market price. This is NOT a spread, this is simply giving the person who is on the opposite side of your trade a better deal, and in turn, yourself a worse deal.

3) I already covered this and you are right, it is not a "secret" spread, at least not if you can see actual floating spread Level II quotes. You can believe what you want but a fixed spread brokerage will NOT fill orders between the floating spread. The reason is simple: They can't make money by doing that.

If you get an order filled at the posted fixed spread price, and the actual floating spread is much larger, the fixed spread bid and ask will not move until the floating spread has closed to the fixed spread n on either side. Just because they show you a 3 pip spread on your screen doesn't mean that if the floating bid or ask moves 3 pips that your fixed spread will move.

You can watch this phenomenon in action if you open up Level II during a low volatility time period and watch the floating quotes vs the fixed spread quotes. What you will see is the floating bid/ask moving around a whole lot while the fixed spread may not move for a LONG time. (Unless of course you are on the wrong side of the trade, you will see the fixed spread move quickly, because guess what? The brokerage is saying KaChing KaChing.)

You guys are thinking too much about this instead of actually investigating it. It is very hard for me to describe this in words when in reality you could watch it for 15 mins on your screen and it would become blatantly clear.

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Postby jhtumblin » Mon Nov 13, 2006 6:31 am

How do you explain the exorbitant rollover rates of EFX as compared to 'fixed spread brokers'? When you place limit orders, how do you know what the spread is at the point of execution? Under what circumstances is trading with an ECN better than a bucket shop?


Are you talking about the spread @ time of rollover? If so it is not exorbitant it is actual. Refer to my previous post.

You can only know what the spread is at the time of execution on a limit order if you are watching the order execute, or otherwise have a means of tracking the bid/ask prices during execution (a program perhaps?)

I personally have found no circumstances when trading with a bucketshop is better than ECN (Once again if you are the average retail client)

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