What is a Spread Only Account in Forex?

Each time you place a forex trade, you have to pay a small fee to the broker. Some forex brokerage accounts refer to this expense as a commission fee. However, other brokers take a spread-only approach. Instead of charging a commission fee, brokers put their markup in the spread. This model is friendly for beginners and offers a simple cost structure. However, it’s good to know the pros and cons before committing to a spread-only account.

What is a Spread-Only Account?

Spreads are the foundation behind spread-only accounts. A forex spread refers to the gap between an asset’s bid price and ask price. The bid price represents how much you can sell an asset for, while the ask price indicates how much you must pay to buy an asset.

The ask price is always higher than the bid price, and the difference is an interbank market fee. Either way, you’ll have to pay more than the interbank market fee. Some brokerage accounts tack on a commission on top of the interbank fee, while others impose a markup on the interbank fee.

Spread-only accounts result in higher bid-ask spreads, but the tradeoff is that these accounts are commission-free. After you cover the spread, you won’t have to pay any additional fees to initiate a trade. 

How Spread-Only Accounts Work

Spread-only brokerage accounts charge a markup for each spread. That markup can change at any point due to volatility, liquidity, new broker policies, and other factors. Many traders look at pips to assess a spread-only account’s markup. This markup gets more expensive for larger orders since the bid-ask spread stays the same for each unit you buy.

For instance, if EUR/USD has a bid price of 1.1347 and an ask price of 1.1349, the spread is 2.0 pips. A single pip is 0.0001, so 2.0 pips is 0.0002. The only exception is forex pairs that involve the Japanese Yen. In these cases, one pip is 0.01.

For the EUR/USD example with 2.0 pips, the total cost of the trade depends on how many units you buy. If you buy 10,000 units of EUR/USD with a 2.0 pip spread, you can use the following formula to calculate the total cost:

2.0 pips = 0.0002

Total cost of the spread = Pips as a decimal x Trade size

Total cost of the spread =  0.0002 x 10,000

Total cost of the spread = $2

Investors who make small orders may save money with a spread-only account. Some brokerage firms would charge a flat $5 fee for all trades, regardless of their size.

However, this order would be more expensive if an investor were to buy 100,000 units of EUR/USD. Then, the total cost of the spread would come to $20. This scenario demonstrates that spread-only accounts aren’t for everyone. These are the pros and cons to consider.

Pros

These are some of the advantages of using a spread-only account for your forex trades.

• Simpler cost structure: These accounts are commission-free. You only have to look at the spread. You won’t incur any additional costs.
• No separate commission fees: There’s no need to pay a commission fee for each trade if you use a spread-only account.
• Beginner-friendly: These accounts simplify trading costs and make it easier to get started.

Cons

Although spread-only accounts have their perks, they aren’t for every forex trader. These are some of the downsides to consider.

• Typically wider spreads: Wider spreads make big trades more costly than brokerage accounts that offer flat commissions for every trade.
• Not ideal for scalpers or high-frequency traders: Wider spreads make it more difficult to profit from forex trades. Spread-only forex brokers can increase their markup at any time and catch forex traders off guard. Commission trading makes your trading costs more predictable, especially when it’s time to sell a forex pair that you’ve been holding for a few days.
• May have hidden costs in volatile markets: Brokers often raise their markups during volatile markets. If you enter a trade during a period of low volatility, it will be more expensive to exit that same trade if the market experiences sharp price movements.

Spread-Only vs. Commission-Based Accounts

Spread-only accounts and commission-based accounts let you access the same assets. It’s not as if one of these accounts offers better forex pairs than the other. These are the nuances between these accounts:

• Spread width: Commission-based accounts have narrower spread widths than spread-only accounts
• Execution type: Both accounts offer market orders, limit orders and other types of orders. Spread-only accounts have faster execution times.
• Cost transparency: Spread-only accounts offer more cost transparency than commission-based accounts

Who Should Use a Spread-Only Account?

A spread-only account is suitable for long-term investors and low-volume traders. These accounts are great for beginners, and you can save money with this account if you don’t trade too often.

However, you should not get a spread-only account if you are a high-frequency trader or use scalping strategies. These people will get hurt by the wider spreads in spread-only accounts. Individuals who use these strategies and regularly trade large orders should use a commission-based account instead of a spread-only account. 

Forex Brokers That Offer Spread-Only Accounts

Forex traders can choose from several brokerage firms that offer spread-only accounts. These are some of the top choices. 

FOREX.com

FOREX.com gives investors access to more than 80 currency pairs with commission-free accounts. The firm displays the cost of every trade so you can assess how much a currency pair has to rise to generate a return on your investment. You only need a $100 minimum deposit to get started. 

Plus500

Plus500 offers portfolio analysis tools that let you assess your portfolio’s performance, profit/loss breakdown, and other key metrics. This spread-only account has helped the company attract more than 30 million customers worldwide. You only need $100 to open an account and can use the company’s demo live quotes to test your strategies before using real money.

tastyfx

tastyfx offers commission-free trades that start at 0.8 pips. The firm serves 300,000 clients worldwide and offers exposure to more than 17,000 markets. Customers get 24/7 trading support and can opt into a forex-focused newsletter.

OANDA

OANDA lets its customers choose between spread-only accounts and commission-plus-core accounts. The company offers transparent pricing and lets you practice with a demo account first. OANDA also provides volume-based rebates, discounted financing, and other perks if you upgrade to a premium account.

Trading Forex Spreads While Minimizing Costs

Spread-only accounts make it simpler to get started with forex trading. It’s a great model for people who don’t trade very often, but scalpers and high-frequency traders may want to consider a forex brokerage account that has commissions. These accounts are pretty easy to use, and many of the brokerage firms that offer spread-only accounts give you the option to switch to commission-based accounts.

Frequently Asked Questions