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FXCM is changing the spread and commission structure offered to clients; and this article is designed to walk you through those changes.
For more details, please read the sections below this summary. Raw spreads include no markup, and this is like other markets such as stocks and futures in the fact that the spread is completely a function of liquidity and prices offered via liquidity providers. FXCM's commission is now separately accounted for as a 'commission' based on the pair and size traded. This is also coupled with an overall reduction in trading costs that can greatly benefit customers. We explain further in the following sections.
To calculate spreads using the new commission model with comparison to the old model: Trading is much like any other business that one might embark upon. This net profit is money in the pocket… this is income, and this is the reason that people trade or go into business… the goal of making money.
A key part of this equation is cost. FXCM is embarking on a massive change with the goal of helping customers in that search for profitability. FXCM is initiating a change to reduce transaction costs while also making these costs significantly more apparent.
For now, we want to show off some of the new spreads along with the process to calculate transaction costs. Previously, FXCM rolled all transaction costs into the spread with the goal of making this easier for clients to manage. This was a standard operating procedure in retail FX, but was quite a bit different than other markets such as stocks, futures, or options. Under the new pricing structure — there are two separate costs that are incurred when trading a position and this is very similar to those previously mentioned markets like stocks and options.
The first is the spread… and the big difference is the size of the spreads. The second is the commission. Previously, the spread on FXCM platforms included the commission or markup charged by FXCM.
The spread is now a pure function of liquidity and prices at which liquidity providers are willing to bid or offer in that particular market. This is similar to the manner in which equity, commodity, and option markets trade. FXCM will receive no compensation from the spread under the new commission model.
Please note that spreads will still be variable based on market activity. The reduction in spreads is remarkable. Previously the average spread on EURUSD was 2.
The average spread on EURUSD under the new model is. The average spread on AUDUSD under the new model is. You can see the full list of average spreads under the new model at the link below: The biggest change is going to be the inclusion of a separated commission that was previously included in the spread. There are two different commission structures based on the pair being traded. Very liquid pairs such as EUR USD , GBPUSD , USDJPY , USDCHF , AUDUSD , EURJPY , and GBPJPY will be four cents per 1k, per side.
So if a trader places a 1k trade in EUR USD , the commission to enter the position would be four cents. The commission to exit the trade would also be four cents. So a 1k trade in AUDCHF would cost six cents to enter, six cents to exit for a total commission of twelve cents.
A larger trade size, such as k in AUD CHF would entail a commission of six dollars to enter and six dollars to exit.
Spreads and commissions are being reduced with the new pricing model from FXCM. The average spread in EURUSD was previously 2. Now the average spread is. The new model also introduces a commission on each trade of four cents per 1k on the most liquid pairs such as EURUSD.
A 1k trade in EURUSD previously was 25 cents 2. The image below walks through the new pricing model using various trade sizes in EURUSD: FXCM wants their traders and customers to win.
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FXCM was a pioneer with No Dealing Desk Execution; which aligns the interests of the broker with those of their clients. With NDD execution, FXCM passes all orders received directly to the liquidity provider offering that price. This means FXCM never trades against their clients, and only receives income when traders place trades. In this relationship, the interests of the broker and client are aligned.
This differs mightily from the dealing desk scenario in which the broker can take the other side of client trades… meaning if the client wins, the dealing desk could lose. This inherent conflict-of-interest was a necessity at the beginning of the retail FX market, as banks had little interest in taking a k standard lot position, much less a mini 10k or micro 1k lot; but today, this model is antiquated and quite frankly, potentially dangerous to clients and brokers.
FXCM acts in the true essence of a broker — as a conduit between buyers and sellers, making a small amount on each transaction for the service provided. The new pricing model along with reduced commissions is another aim to help those traders even more. Before employing any of the mentioned methods, traders should first test on a demo account.
The demo account is free; features live prices, and can be a phenomenal testing ground for new strategies and methods. Click here to sign up for a free demo account through FXCM. James is available on Twitter JStanleyFX. Are you looking to take your trading to the next level? Please click on the link below to complete our Trader IQ questionnaire. Trader IQ via Brainshark. Would you like to trade alongside seasoned professionals throughout the trading day?
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