Raw spread refers to the difference between the bid (buy) price and the ask (sell) price in financial markets, which is received directly from liquidity providers. This type of spread is entirely transparent and is offered without any additional markup or extra fees imposed by brokers. In essence, raw spread reflects the actual market conditions and is often found in professional or ECN (Electronic Communication Network) accounts.
These types of accounts are typically suitable for traders seeking lower costs and transactions under real market price conditions. Due to the absence of added profit margins, raw spreads can be extremely low and competitive during market volatility. However, brokers often charge a commission alongside the raw spread to compensate for their service costs.
How to Calculate Raw Spread
Calculating the raw spread is straightforward; simply find the difference between the bid and ask prices. For example, if the bid price of an asset is 1.2000 and the ask price is 1.2002, the raw spread in this case would be 0.2 pips.
Since raw spreads represent the lowest possible spread in the market, many brokers with raw spread accounts charge a separate commission per trading lot to offset their service costs. Therefore, traders should factor in commission fees alongside the raw spread when analyzing their trading costs.
How Many Pips is a Spread?
In financial markets, the spread refers to the difference between the bid (buy) price and the ask (sell) price of an asset, and it is typically measured in pips. A pip (percentage in point) in most currency pairs equals 0.0001 of the exchange rate. For example, if the EUR/USD pair has a bid price of 1.2000 and an ask price of 1.2002, the spread would be 2 pips.
For some currency pairs quoted with two decimal points (such as USD/JPY), one pip equals 0.01 units. The spread amount can vary and is influenced by factors such as market liquidity, economic conditions, and the type of trading account. In raw spread accounts, this amount is usually much lower and can sometimes be less than 1 pip, whereas in standard accounts, the spread is typically higher.
Advantages and Disadvantages of Raw Spread
Advantages
Fast Trade Execution
Fast trade execution in raw spread accounts is another key strength. These accounts are typically offered on ECN (Electronic Communication Network) platforms, which provide direct access to liquidity providers, resulting in significantly faster trade execution. This is particularly important in volatile markets, where swift entry and exit from trades can have a direct impact on profitability.
Price Transparency
In this type of spread, prices are obtained directly from liquidity providers, and the broker does not apply any additional markup to the prices. This transparency allows traders to access the most accurate and real time market prices. Consequently, for strategies that rely on small market fluctuations, raw spread accounts can be an ideal option, reducing hidden trading costs.
Lower Trading Costs in Normal Market Conditions
Another advantage of raw spread accounts is the lower trading costs in stable market conditions. Since spreads are often very narrow in these situations, traders can execute their trades at minimal cost when the market is calm. This feature is a major advantage for scalpers and traders who execute frequent, short term trades.
Disadvantages
Significant Spread Widening in Volatile Market Conditions
During periods of extreme market volatility or major economic events, raw spreads may widen rapidly. This sudden increase can be detrimental to traders who have set tight stop loss levels, and in some cases, it may even lead to unexpected trade closures.
Commission Costs
Unlike fixed or variable spread accounts, where the broker’s profit is included in the spread itself, brokers in raw spread accounts usually charge a fixed commission per trading lot to cover their service costs. As a result, traders must consider both the spread and commission costs in their decision making process.
Raw Spread Accounts Are Designed for Professional Traders
Another point to consider is that raw spread accounts are generally designed for professional traders and may seem more complex for beginners. Since managing commission costs and controlling risk in these accounts requires greater experience, traders without sufficient knowledge in this area may face difficulties in effectively utilizing raw spread accounts.
Why Do Traders Prefer Raw Spread?
Professional traders typically prefer raw spreads due to their high transparency and lower trading costs. In this type of spread, prices are received directly from liquidity providers and are offered without any markup or manipulation by the broker. This transparency helps traders gain a precise understanding of actual market conditions and execute their trades with greater confidence.
Moreover, raw spreads are usually very low and competitive under normal market conditions, which is particularly important for strategies such as scalping or day trading that rely heavily on low transaction costs. The fast and accurate execution of trades in raw spread accounts is another reason why many professional traders prefer this type of account, as it minimizes trade execution delays and price slippage.
Ultimately, raw spread, along with a separate commission fee, is a completely cost effective and logical option for individuals who engage in high volume trading and seek the lowest possible costs.
Difference Between Raw Spread and Standard Spread
Choosing between a raw spread or a standard spread depends entirely on the type of trading strategy being used. Below are the key differences between these two types of spreads:
1. Spread Size in Normal Market Conditions
One of the fundamental differences between these two models lies in the spread size. Raw spreads are typically much lower and more competitive under normal market conditions, sometimes even dropping below 0.1 pips for certain assets. This feature is particularly important for traders who operate in short term timeframes and seek the lowest possible costs. In contrast, standard spreads are generally higher due to the broker’s added profit margin and may increase to several pips in volatile assets.
2. Suitability for Different Strategies
Raw spread accounts, thanks to their low spreads and fast trade execution, are ideal for traders using strategies like scalping and day trading. These traders usually operate in short timeframes and require the lowest possible spread rates to reduce costs.
Conversely, standard spread accounts are more suitable for beginner traders or those who trade less frequently. These accounts have a simpler structure, making it easier to calculate trading costs.
3. Transparency and Access to Real Market Prices
Raw spread accounts are usually offered on ECN (Electronic Communication Network) platforms, allowing traders to connect directly with liquidity providers and access real market prices.
In contrast, standard spread accounts are generally operated in brokers’ internal dealing desk environments, where the broker may act as the counterparty to the trade and influence prices.
4. Pricing Calculation and Presentation
Raw spreads are based on real and pure market prices received directly from liquidity providers. In this type of account, the broker does not add any markup to prices, ensuring the rates are fully transparent and reflective of actual market conditions.
In contrast, standard spreads usually include the broker’s profit margin, which is embedded within the difference between the bid and ask prices. As a result, trading costs are directly integrated into the spread itself, and traders typically do not pay a separate commission.
5. Commission Charges
In raw spread accounts, although spreads are significantly lower, brokers charge a fixed commission per trading lot to compensate for their services. This commission varies depending on the broker and trade volume.
In contrast, standard spread accounts bundle the broker’s fees within the spread itself, so traders generally do not pay a separate commission. This distinction makes the choice between these two models largely dependent on trade volume and trading strategy.
6. Impact of Market Volatility
Raw spread accounts may experience significant spread widening during volatile market conditions. When major economic news is released or the market becomes unstable, raw spreads can increase suddenly.
Conversely, standard spread accounts, due to their more stable nature, are generally less affected by extreme volatility, providing traders with more predictable costs.
Commission Analysis in Raw Spread Accounts
In trading accounts with raw spreads, although the spread is very low and sometimes close to zero, brokers usually charge a fixed commission per trading lot to cover their costs. This commission may vary depending on the broker and the type of trading asset but is often calculated as a fixed amount for every 100,000 units (one lot). Unlike standard spread accounts, where broker fees are hidden within the spread itself, in raw spread accounts, the commission is applied separately.
Therefore, traders using these accounts must factor in both the spread and commission costs in their calculations. Especially in high volume or frequent trading, these commission fees can have a significant impact on a trader’s overall profitability. Choosing a raw spread account is generally considered a more logical and cost effective option for those who engage in high volume trading and aim to minimize costs per trade.
Difference Between Spread and Commission
A spread refers to the difference between the bid (buy) price and the ask (sell) price of an asset and is considered a hidden cost in trading. In standard spread trading accounts, this cost is directly included in the prices, and traders do not pay an additional separate fee.
Conversely, a commission is a fixed and separate fee charged by brokers in some trading accounts, particularly in raw spread accounts. This commission is typically calculated as a specified amount per trading lot and is clearly recorded in trading reports. Generally, spreads can be either fixed or variable under normal market conditions, whereas commissions are usually fixed amounts.
Reason for Spread Increase at Night
One of the main reasons for this increase is reduced liquidity in the market during late night hours. At this time, trading volume drops significantly as most major markets, such as those in the United States and Europe, are closed, and only a limited number of market participants are active. Reduced liquidity leads liquidity providers to widen spreads to mitigate their risk.
Additionally, the increased risk of price volatility during nighttime hours is another influential factor. During this period, with fewer buyers and sellers in the market, sudden price changes can be more intense, prompting brokers to widen spreads as a risk management measure.
Furthermore, some brokers may temporarily widen spreads during their internal processes, such as daily account settlements or overnight interest rate calculations (swap). As a result, traders who operate at night should be aware of these conditions and manage their trades with greater caution.
How to Reduce Spread?
To achieve lower spreads, choosing trading accounts with raw spreads or ECN accounts is one of the best strategies. In these types of accounts, prices are received directly from liquidity providers, and due to the absence of additional intermediaries, spreads are usually lower and more competitive. Additionally, selecting a broker that collaborates with multiple liquidity providers can help offer better and more stable spreads.
Timing your trades also plays a crucial role in reducing spreads. Spreads are typically at their lowest during peak market activity hours, especially when the European and U.S. trading sessions overlap. During these periods, liquidity is high, and the difference between the bid and ask prices narrows.
Professional traders can also benefit from lower spreads by choosing assets with higher liquidity, such as major currency pairs (e.g., EUR/USD). Ultimately, proper timing and selecting the right account type can significantly reduce spread related costs.