What are spreads?

small_bites

Newbie
5 1
What are spreads? (specifically for scalping with a spread betting/CFD account)

From what i've read i'm getting conflicting answers:
  • difference between buy and sell price
  • broker commission on opening and closing positions
  • Difference between real time market price and overt user captured price
What's got me a little confused is the broker disclosed 'point' spreads (eg. 0.8 points on the UK 100). So I'm under the impression these are fixed broker commissions. Then I see a bunch of threads floating around on the web suggesting it's not fixed and the undesirable variables kick in during high volatility/volume trading periods.

I would appreciate if someone can clear up the above with a more fathomable description for a beginner, preferably with an example.

thanks in adv.
 

tomorton

Legendary member
8,378 1,335
The firms always quote their minimum spreads, the spreads they apply when at least the London stock market is trading, if not New York as well. Outside these hours spreads will be wider, perhaps up to 10 time wider on some instruments. Spreads also widen out around news announcements, at the London open, the US open. Its a reasonable assumption that the firms widen their spreads when they find it hard to anticipate market direction and their exposure to risk: if even they find it so hard, perhaps we should stay clear of small-scale trades at such times.

Spreads don't normally show up on charts, the chart price is normally drawn using the bid quote (the sell price).
 

small_bites

Newbie
5 1
Appreciate the quick reply.

So is it correct to assume that spreads are broker commissions?

Could you elaborate on how a spread is applied? For example, let's say a broker suggests 0.8 points on the UK 100 instruments. If the instrument real time market price is £132.50, does 0.8 points tally up to £133.30 as the broker buy/sell position? As simple as that or am I missing additional computations to wrap my head around the point vehicle?

The firms always quote their minimum spreads,

ah, that makes sense! oddly enough that evaded my thought process

Outside these hours spreads will be wider, perhaps up to 10 time wider on some instruments. Spreads also widen out around news announcements, at the London open, the US open. Its a reasonable assumption that the firms widen their spreads when they find it hard to anticipate market direction and their exposure to risk: if even they find it so hard, perhaps we should stay clear of small-scale trades at such times.

Spreads don't normally show up on charts, the chart price is normally drawn using the bid quote (the sell price).

I take it traders view both in-house broker charts as well as external real-time market action charts to determine spread volatility? Or is there a better/more convenient method to differentiate between the 2 extremes. Those 10-times broader spread attacks or event-like broker pre-engineered spread increases is something i'd definitely want to avoid or in the least keep tracks of during "small-scale trades". I'm all about risk management but a long way to go :)

EDIT: was also meaning to ask, do broker spreads only apply to opening positions or both open+close?
 
Last edited:

tomorton

Legendary member
8,378 1,335
Appreciate the quick reply.

So is it correct to assume that spreads are broker commissions?

Could you elaborate on how a spread is applied? For example, let's say a broker suggests 0.8 points on the UK 100 instruments. If the instrument real time market price is £132.50, does 0.8 points tally up to £133.30 as the broker buy/sell position? As simple as that or am I missing additional computations to wrap my head around the point vehicle?



ah, that makes sense! oddly enough that evaded my thought process



I take it traders view both in-house broker charts as well as external real-time market action charts to determine spread volatility? Or is there a better/more convenient method to differentiate between the 2 extremes. Those 10-times broader spread attacks or event-like broker pre-engineered spread increases is something i'd definitely want to avoid or in the least keep tracks of during "small-scale trades". I'm all about risk management but a long way to go :)

EDIT: was also meaning to ask, do broker spreads only apply to opening positions or both open+close?

Yes, its as simple as that. Tthe spread is the broker's profit margin. In retail terms, a shopkeeper puts a loaf on sale at say 120p: but he did not pay 120p for that loaf, he paid maybe 70p. So if you want to buy it you will have to pay 120p and he has made 50p profit. If you are a baker and you make a loaf and you want him to buy it to put in his shop he will offer you 70p. If you bought a loaf from him at 120p you have "gone long" on bread: if you decide to sell it back to him, then you are trying to close your position and get flat: he will still only offer you 50p less than what you paid so price must rise at least 50p from when you bought before you make a profit.

Some trading platforms or chart software can be re-set to show both bid and ask prices, but most charts show only the bid. If you can see both on the chart you can tell if the spread is widening or contracting. The most accurate expression of price from the broker is the quote, not the chart: there's always some small print saying the broker's charts are illustrative only and not a formal offer to transact on the prices displayed.

Spreads apply at all times, and all firms widen their spreads throughout a normal trading day. Take a look what happens up to and around the London open at 8.
 
 
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