Both floating spread and raw spread are popularly known for their similarity to market prices. But which one is better and how to decide it?
Looking at the title you must be wondering, isn't floating spread and raw spread the same thing? Well, you're not wrong but you're not completely right either. There is a key point that separates both types of spreads. But before we get into their difference, we need to understand what exactly is a spread.
A spread is basically the difference between the market price of a currency pair and the price being offered to you by your broker. In more technical forex terms, a spread is referred to the difference between the bid price and the market price. It is also the difference between the buying price and the selling price of a currency pair. Every broker charges a spread on their assets. The price difference or the spread of a currency pair is what the broker gets as their profit. This is how most of them make the majority of their money. Some brokers may charge higher spreads than others. Others may offer minimal spreads but charge you with a commission instead. Depending on your broker of choice and account type, your type of spread may vary.
What is Floating Spread?
A floating spread is when the market price of a currency pair and the price being offered to you are constantly changing. It is important to note that this is totally normal. In fact, you will very rarely find a broker that is offering fixed spreads. Most brokers' accounts are floating spread accounts. Now there are a number of factors that cause a spread to vary, or in other words, float. Market stability, liquidity, and broker profits are the biggest deciding factors for a floating spread. Generally, a floating spread is lower when the market is stable and liquidity is high, whereas there may be a much larger floating spread if the market is unstable and liquidity is low.
What is Raw Spread?
A raw spread is also a type of floating spread but with some minor tweaks. The floating spread is much less in a raw spread account than in a regular floating spread or standard account. A trading account that offers raw spread is also popularly known as an ECN account. A broker does not earn any profits from the spread of an ECN account. They instead earn through other means such as commissions.
The spread in a raw spread account only varies due to two factors: Market stability and liquidity. Just like regular floating spreads, when the market is stable and liquidity is high, the spreads are low. Similarly, when the market is unstable and liquidity is low, spreads are going to be high.
So, Which One to Choose?
Now that we've got each type of spread properly understood, what's really their differentiating factor? If it wasn't pretty obvious by now, the thing differentiating a raw spread and a floating spread is broker profits. A broker does not take any profits from a raw spread account, therefore they're able to make the spreads really tight and almost negligible. Whereas in a standard account, the spreads are higher because the broker takes a part of it as their earnings.
From that comparison, it might seem that raw spread is definitely better than floating spread. Nonetheless, it is important to note that raw spread is almost always accompanied with trading commissions. So, in terms of the total trading costs, it might be about the same as floating spread. The striking advantage of a raw spread account that is not available in any floating spread account is the market execution that comes from ECN technology. Unfortunately, ECN accounts are usually offered with higher minimum deposits. This can be mitigated by applying in a low commission ECN account.