Beginner Question: Spreads

D

DannyBens

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.
 
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.
 
Quote from MTE:

That's how they make money.

MTE, for them to make money in the spred it means that the forex market makers should hedge every trade that we make, and that is not the case, they have no place to hedge the mini orders, and as far as i'm aware they keep the orders and hoping for us to lose.
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Quote from liri:

Quote from MTE:

That's how they make money.

MTE, for them to make money in the spred it means that the forex market makers should hedge evey trade that we make, and that is not the case, they have no place to heghe the mini orders, and as far as i'm aware they keep the orders and hoping for us to lose.
More...

Yeah, I know that, I was just trying to put it in simple terms, without going into the details. ;)
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Quote from DannyBens:

This makes me wonder if I should ask "wow wow wow... what details?"....
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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.
 
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)
 
Quote from DannyBens:

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)
More...

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, www.elitetrader.com/vb/showthread.php?s=&threadid=48487

Sometimes paying commissions is not a bad thing at all.
 
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.
 
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