What Does Raw Spread Mean in Forex?

Foreign exchange (forex) trading involves the simultaneous buying and selling of currencies within a global marketplace. The “spread” is a primary cost for traders, and understanding its structure is crucial for profitability. This article clarifies the concept of raw spread and compares it to other common spread types in forex.

Understanding Spreads in Forex

A spread in forex trading is the difference between a currency pair’s bid price (what a buyer will pay) and ask price (what a seller will accept). This price difference is the transaction cost for trading, and how brokers or market makers generate revenue. Traders incur this cost instantly when opening a position, as they buy at the higher ask price and sell at the lower bid price.

Spreads are measured in “pips,” the smallest unit of price movement for a currency pair, typically 0.0001. For example, if EUR/USD is 1.1050 bid and 1.1052 ask, the spread is 2 pips. This cost accumulates, especially for frequent traders, making it a significant part of overall trading expenses.

Spreads compensate brokers for their role as intermediaries and liquidity providers. Brokers match buyers and sellers, buying currency at a slightly lower price and selling it at a slightly higher price. This mechanism allows them to profit without charging a separate fee for each transaction in some account types.

Spreads also reflect market conditions like supply and demand. A narrower spread indicates higher liquidity, with many active buyers and sellers. Conversely, a wider spread suggests lower liquidity or higher market risk. Traders incur this cost regardless of buying or selling, as it is built into both bid and ask prices.

Defining Raw Spread

Raw spread is the direct difference between bid and ask prices from liquidity providers, without broker markup. This exposes traders to the actual market spread, which can be very narrow, even near zero during high liquidity. The term “raw” means the broker does not inflate the spread for profit.

Brokers offering raw spreads typically use Electronic Communication Network (ECN) or Straight Through Processing (STP) models. ECN brokers connect traders directly to a pool of liquidity providers. STP brokers route client orders directly to liquidity providers without dealing desk intervention. Both models provide transparent pricing by passing on interbank market rates.

Since these brokers do not profit from widening the spread, they generate revenue through commissions charged per trade or per lot. A common structure is a fixed fee, such as $3.50 to $7 per standard lot for a round-trip trade. This ensures the broker earns revenue regardless of trade outcome, aligning interests with competitive execution.

For example, a broker might offer EUR/USD with a 0.1-pip raw spread, plus a $7 commission per standard lot. The total trade cost includes this small raw spread and the explicit commission. This transparent structure appeals to high-volume traders, scalpers, and automated systems, allowing precise cost prediction and potentially lower overall expenses than models with hidden markups.

Raw Spread Compared to Other Spreads

Raw spreads differ from fixed and variable spreads in how broker compensation is integrated. Fixed spreads maintain a constant bid-ask difference, regardless of market conditions. Market maker brokers often offer these, acting as counterparty and controlling displayed prices. While predictable, fixed spreads can be wider than raw spreads in calm markets and may lead to re-quotes or slippage during volatility.

Variable spreads fluctuate continuously based on market dynamics like liquidity and volatility. Brokers offering variable spreads include their profit margin within the spread, widening it for revenue. This contrasts with raw spreads, where no markup is added to the interbank rate. Variable spreads can be tight during liquid hours but widen significantly during news events or low liquidity.

The key difference in total trading cost is the payment mechanism. With fixed or typical variable spreads, the entire cost is embedded within the spread, with no separate commission. For example, a standard account might have a 1.5-pip EUR/USD spread with no explicit commission. Raw spread accounts, however, feature extremely tight spreads (e.g., 0.0 or 0.1 pips) but charge a per-trade commission.

Comparing total costs, a raw spread account might have a 0.1-pip spread plus a $7 commission per standard lot, versus a 1.5-pip variable spread account with no commission. The optimal choice depends on a trader’s volume and strategy. High-frequency traders may find raw spreads plus commissions more cost-effective due to the narrow spread. For smaller volumes or less frequent trading, a fixed or variable spread account without commissions might be simpler.

Factors Influencing Raw Spread

Raw spreads are dynamic, influenced by several market conditions. Market liquidity, the ease of buying or selling a currency pair without significant price impact, is a primary factor. Highly liquid pairs like EUR/USD have tighter raw spreads due to many buyers and sellers. Less liquid pairs, such as exotic currencies, typically have wider raw spreads due to fewer participants and harder order matching.

Market volatility also influences raw spread width. During high volatility, like around major economic news or geopolitical events, raw spreads widen. This happens because increased uncertainty and rapid price movements create greater risk for liquidity providers, who compensate by increasing the spread. In calm markets, raw spreads typically narrow.

The time of day directly impacts raw spreads due to major trading session overlaps. During peak hours, when multiple financial centers are open, liquidity is highest, leading to tighter raw spreads. For example, the London and New York session overlap often sees the tightest spreads for major currency pairs. Outside these hours, liquidity decreases, and raw spreads may widen.

Major economic news events also significantly influence raw spreads. Scheduled announcements, like interest rate decisions or employment figures, can cause sudden volatility spikes and temporarily widen raw spreads. While raw spreads generally offer low costs, traders should be aware these market-driven factors can lead to unexpected increases in trading expenses during specific periods.