An Empirical Analysis of Spread for Two Types of FX Brokers

Abstract

Foreign exchange market is the largest financial market with a daily turnover more than $4 trillion. The existence of many brokers in this market makes the decision of choosing the right broker difficult. For traders, bid-ask spread is one of the most important factors in order to choose a broker with minimum cost of exchange. There are two different main types of brokers in terms of bid-ask spread. Some offer fixed spread and others offer variable spread for exchange of currency pairs. There has been uncertainty among traders whether fixed spread or variable spread brokers offer the lower bid-ask spread and as a result the lower cost of transaction. This study makes an empirical analysis of spread for these two types of brokers. Liquidity features of currency pairs have a significant role in exchange of currency; hence this feature is measured and investigated. The findings based on this research shows that variable spread brokers tend to have a lower spread and as a result the traders profit is higher compared to trading with fixed spread. Furthermore, under this study, the currency pairs with the USD has been identified most liquid.