Understand the spread – Basic

The spread is the contrast between the price of the contract and the quoted offer price for any financial security. For all the markets they sell, all spread betting businesses quote a bid-offer spread.

These are super-fast data feeds with very specific rates, spread betting firms, brokers, get these prices from their liquidity providers or exchanges, the broker can not afford to quote a price that is out of date by even a second or two.

The bid price is the lower price, the price at which sale orders are filled, quoted in the spread. The price of the bid is the higher price quoted in the distribution and the price at which purchase orders are filled.

The cost of trading is essentially the spread in spread betting, since the spread is where spread betting companies make their money. For spread betting, there are no fee costs. Instead, the trading “fee” is built into the quoted spreads.

Through market making, the spread betting business makes most of its money, which implies that lots of traders come together in a specific market, lots go long at the offer price, lots go short at the bid price. As long as this market flow is not too lopsided, the broker is not too fussed over whether its customers are long or short. The broker knows that it can make a bit of money every time someone trades by quoting a spread on average.

How the spread is calculated

In the end, a commercial judgment for the broker is the size of the spread offered on a spread bet. Many spread betting companies only apply a mark-up to the spread of the underlying financial asset’s bid-ask spread. To provide the spread betting business with a net profit on all the spread bets made on a given asset, the mark-up was carefully calculated.

Fixed vs Variable Spread

By either having fixed or variable spreads, you appear to be able to group spread betting companies. A spread betting broker offering variable spreads will continuously alter its spread in line with these adjustments in the bid-ask spread in the underlying financial security changes. When betting on actively traded shares, where trading is very liquid, such as the most common stocks or currency pairs in the forex market, the spread would be narrower. A larger bid and offer spread would represent more thinly traded markets.

A broker of fixed spreads will keep its spreads fixed during set market hours, regardless of what happens in the financial asset’s underlying market. This fixes its market spread and will be released on its trading website. When trading with a fixed spread broker, traders become more open about the costs of trading.

Traders need to find the best balance for them, like all commercial decisions, and get value from the broker they select. It really helps to do your homework here and not just go to the broker with the highest marketing budget, it has to be paid for somewhere and generally through a wider spread.

The Time Element

In calculating the distribution, time is also a factor.

Daily spread bets would have a narrow spread that represents the short span over which the bet is priced. Know, traders are going to pay a charge to roll the bet overnight, which is later discussed.

The broadest bid and bid spreads with the more distribution dates will be those for potential spread bets. The ‘carry premium’ is included in the spread for futures. All costs for keeping the asset from now until delivery/expiry are included in the carrying cost. There are several exceptions, but the main cost of carrying for most futures is the cost of borrowing the cash to fund the position. Transport, storage and defense are other expenses.

Conclusion

It is important to consider how trading costs are integrated into the spread and how this theoretically impacts the profit margin on each spread bet in order to make a profit spread bet. The following are the basic points to bear in mind:

A spread will be billed by every spread betting provider. This is what helps the spread betting business to make cash.

There are either fixed or variable spreads provided by spread betting firms. In line with the bid offer in the underlying market, variable spreads tighten and widen, fixed spreads do not and can offer greater trading cost transparency.

The width of a spread is determined by the commercial offering of your broker, underlying demand and time frame of the bet.