Forex Broker Spread Models Comparison Commission Vs No Commission?

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Every forex broker on the market has a commission structure based on one of two models

. It would be either a model with an increased spreads and no side commission, or a raw (or straight) spread with a side commission structure.

The general understanding of traders is that the increased spread model without a side commission is better than paying a side commission with a raw spread. From the visual perspective a trade without a side commission may look better than seeing the commission next to each trade, however traders should take into account few other considerations which will show that the general understand is not quite right.

You need to first understand the fact that no matter if the broker's model charges a side commission or not, you are always paying a commission. Its just that with one model your commission is paid by charging a higher spread on each currency pair, while the other model has a much lower spread and charges a side commission.

The model with raw spreads and side commission is much more transparent to the trader than the model where the commission is built in the higher spread. With the side commission model, the trader always knows what commission he is actually paying and also he always sees what the real market spread is. That is why this model is also used by all top interbank traders and most of the big institutional forex traders.

What you also have to do is to take the overall trade cost into consideration. Lets say for example you are using a broker that has a 3 pip spread on the EUR/USD. As soon as you enter the trade you will be 3 pips down or $-30 dollars on a full lot. Your cost for that trade is $30.00.

On the other hand there is a raw spread forex broker with a side commission like for example iamfx.com/. Now with IamFX given the same example the spread on EUR/USD is usually less than a pip - typically between 0.6 and 0.9 pips per standard lot. On top of the spread they charge a small commission of 1 pip for regular retail traders (even less for big traders).

So what is your cost for the privilege of executing a trade with IamFX ? Well it would be $6 - $9 (0.6 - 0.9 x $10 per pip from the spread) + commission of 1 pip. Totaling $16 - $19.

So when using a broker with no side commission but higher spread model you actually pay $30 in commission but when using raw spread broker with a small side commission like IamFX, you end up paying $16 - $19 in our example. That is a saving of up to $14 per 1 lot trade.

It may not seem like a big saving, but when you are making 50 to 100 trades a month, you quickly see how this can add up fast. Even if you trade 5 lots a month savings could be significant.

I hope this article with comparison of the broker models help you to easily see how trading with raw spread brokers can save you 100s to 1,000s of dollars in trade costs every month.

by: Michael Long

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