There's more to FX pricing than the spread

Some foreign exchange brokers like to make a lot of noise about low spreads to lure in new clients, but as most experienced traders will tell you, there is more to FX pricing than the raw spread.

Visit one of these brokers' sites and you'll see a message along the lines of 'spreads as low as 0.8 pips on EURUSD' with a miniscule asterisk at the end. A tiny little asterisk that, in a nutshell, means they will give you the spread they advertise when their trading conditions are perfect (and you're placing a trade small enough for them to handle), but if they're less-than-perfect they won't - in fact they may not be able to fill your order at all.

So, when you look for a new broker, you should also investigate more than the spread. You should research the broker's quality of execution and transparency around pricing and execution.

What you see is what you should get
This means that when you place a trade, the bid or offer you see on the trading platform, once you have entered the amount you want to trade, should be the price that you get when you click 'sell' or 'buy'.

Some transparent brokers will be able to provide you with 'slippage' or 'rejection' rates. Slippage is how often and how much they had to move your price to fill your trade. Rejection is when the broker cannot fill your trade and rejects it. Make sure you can live with these statistics before choosing a broker.

Other brokers, like Saxo Bank, will only show you a price they know they can fill. We refer to this as 'green prices'. If you click 'buy' or 'sell' on a green price, you'll get that price unless the market price moves significantly before the trade reaches Saxo Bank (due to latency etc.). If Saxo cannot be sure of giving you the price on the screen, the price buttons will be yellow.

Transparent brokers will be able to show you a history of their spreads over time. Saxo Bank has just launched a Historic Spreads tool that allows you to see the average spread and the minimum/maximum spread over a given time period. You can even sort by volume and time of day.

(Click on the image above and try the new Historic Spreads tool.)

Liquidity when you need it
There are more benefits to ‘green prices’ from Saxo Bank. It also means you trade on dedicated liquidity. Let’s say you and another trader decide to buy EURUSD 25 million at the exact same time at the exact same price. Since you both trade on ‘green prices’ Saxo Bank will automatically process both trades disregarding the liquidity available in the interbank market.

If you plan to make large trades, trade during volatile periods or trade in illiquid hours, you should also investigate how the broker's spread widens under these circumstances. That is, is the liquidity available when you need it?

If the broker is a market-maker, like Saxo Bank, it will often be able to handle large trades, overnight trades or trades during volatile periods without widening the spread. If the broker is not a market-maker, but is a 'no dealing desk' broker, then it will only be able to give you the liquidity available in the market, that is, the best spread other bigger banks are prepared to give it. At the very least, your broker should tell you what to expect. Saxo Bank provides full transparency to spreads in the Historic Spreads tool.

When a stop is not a stop
Most experienced traders use stop orders to protect their positions when the market moves against them. In volatile conditions, brokers often struggle to fill stop orders at the desired price, that is, with no slippage. When you choose your broker, make sure to find out what their stop order fill statistics look like or if you have to pay extra to ensure your orders are filled properly. 

A solid broker will not only make these statistics available, but the percentage of orders filled without any slippage will be very high, particularly on the major currencies. Saxo Bank publishes updated order fill statistics on its website every quarter.

In conclusion, when you choose a new broker, make sure to do your research on the quality and transparency of execution and not just on the spread. After all, a few trades where you could not get the price you wanted could cost much, much more than the difference between the advertised spread (with an asterisk!) and the actual spread.