Variable spreads are also known as floating or dynamic spreads. As the name suggests, variable spreads are always changing. With Variable spreads, there is a continuous change in the difference between the bid and ask prices of an asset. Variable spreads are offered by non-dealing desk/direct market access brokers who typically run their business over Electronic Communication Networks (ECN).
The hallmark of brokers offering this model is that they get the pricing of assets from several liquidity providers and pass on same to the trader without the intervention of a dealing desk. Spreads will therefore widen or narrow based on the demand for the asset and the market volatility.
Typically, spreads widen during news releases as well as other periods when the liquidity in the market drops. For example, a trader may open the GBPUSD currency pair with 2 pips in spread, but just as the execution is about to be made, a press release affecting the currencies like Brexit may cause the spread to widen to 10 pips.
If you unsure as to what a spread and pip is or want to know more about fixed spreads, take a look at our What is a spread article.
Pros and cons of variable spreads
Benefits of a variable spread broker
- Floating spreads take away the problem of requotes. This is because the variation that occurs in a floating spread factors in changes of price with respect to demand-supply dynamics. In other words, what you want is really what you get.
- Trading with floating spreads provides more transparent pricing, especially when you consider that pricing from several liquidity providers is made available for greater flexibility.
- Swing and position traders will not be affected by floating spreads.
Disadvantages of a variable spread broker
- Variable spreads are a no-go area for scalpers, as the widened spreads that could occur will eat into any profits that the scalper is targeting.
- Floating spreads are a news trader’s nightmare. This is because the variation in the actual number from the consensus figure will produce wider spreads which increase the unpredictability of the trade outcome.
Fixed vs Variable Spreads: Which is Better?
Generally speaking, frequent traders and those with larger accounts will benefit from floating spread pricing.
Variable spread traders
Swing or position traders: Traders who make hundreds of pips per trade in very few trades that are kept open for days or weeks, benefit from floating spreads.
Large accounts: Traders with larger accounts who prefer having a selection of pricing from different liquidity providers, generally choose floating spread brokers.
Fast Execution: Traders who need faster executions without requotes, often trade with a floating spread broker.