Understanding Spreads

Determining your exchange rate

The topic of spreads in the foreign exchange market isn’t widely understood because it’s somewhat complex. And yet the spread is precisely what determines your exchange rate…and your costs. This page covers spreads as they relate to transferring funds.

To learn more about spreads and currency trading, visit the OANDA Spreads section of the OANDA FXTrade site.

What is a spread?

First, the math. Whenever you exchange currency, you are simultaneously selling your own currency and buying the foreign currency. A spread is the difference between the bid price (the price you sell at) and the ask price (the price you buy at) of a currency pair, quoted in a decimal value called pips. For example, if the quote between EUR/USD at a given moment is 1.2222/4, then the spread is 0.0002 or 2 pips. If the quote is 1.22225/40, then the spread is 0.00015 or 1.5 pips. Wider spreads (more pips) result in a higher ask price and a lower bid price, which means you pay more to exchange your money.

Second, the goods. The spread is how brokers earn their money. Whenever you perform a transfer that requires exchanging currency, a broker (like OANDA) connects you to the global currency market. Wider spreads mean that less of your money is actually being exchanged and transferred. The difference between the spread your broker offers you and the spread your broker pays in the currency market is the “fee” they earn for exchanging and transferring your money.

Why are spreads so important?

Spreads affect your transfer costs in a big way. The wider the spread, the more you pay to buy foreign currency and the higher your transfer costs. FXGlobalTransfer offers you some of the lowest spreads in the industry, saving you money.

Although a pip may seem small, a movement of one pip in either direction can translate into thousands of dollars in gains or losses in the interbank market. Not convinced? Check out our Cost Comparison page.

Spread Policies: what other brokers say

Spread policies differ considerably from broker to broker. In fact, most brokers don't even mention the word “spread” because they don’t want to uncover their hidden fees.

The exchange rates posted by other brokers are usually daily rates, which means they are set in the morning and don't change at all throughout the day. While a broker might boast that there’s room for negotiation, daily rates usually have such wide spreads that brokers lose very little by giving you a slightly better rate. These wide spreads help mitigate the risk of rate fluctuation throughout the day - the only way your broker can ensure profit on almost every transaction.

OANDA's spread policy

OANDA’s FXGlobalTransfer policy is simple: we offer the tightest variable spreads possible with no discrimination and complete disclosure. With FXGlobalTransfer, everyone gets exactly the same spread regardless of transfer amount or account size or type of customer. And to ensure transparency, we clearly display real-time exchange rates during your transaction and on our web site. This makes it easy for you to compare our rates with other brokers' rates – just watch our live rates online and call around to compare.

Call to action

You have nothing to lose and everything to gain. Switch to a broker with a better spread policy and keep more money in your pocket. The only thing it costs you is the time it takes to choose the best broker.

Here’s how to make the best choice:

1. Use our Cost Comparison Tool to understand spreads, see what they’re costing you, and learn how much you’d save with lower spreads.
2. Study the spread policies of other brokers. In detail. Ask questions like "What are your typical spreads?" and "Do all your clients get the same spreads all the time?" For more details, see our Spread Questions for Forex Brokers on the FXTrade website.

Final Thoughts

Ultimately, exchange rates are dictated by the forex interbank market, where rates fluctuate throughout the day, seven days a week. Some brokers try to simplify things by offering daily rates and “no fees”. But keep in mind, there is no such thing as a free lunch. By understanding how spreads determine the exchange rate and affect the cost of your transfer, you can make an informed decision when it comes to choosing the right broker to handle your money.