Who charges the spreads? broker or the liquidity provider?

Beginner Questions
1

Sometimes I am confused about this. Who charges the spreads? broker or the liquidity provider?

2

Your transaction is with your broker. You are paying the spread to the broker.

Different brokers offer trading with larger or smaller spreads. This can make a difference if you trade very narrow positions across small numbers of pips so it could be worth hunting round for good quotes.

3

A spread is a difference between the bid price and the ask price for the trade. The bid price is the price you will receive for selling a currency, while the ask price is the price you will have to pay for buying a currency. The difference between the bid and ask price is the broker’s spread. The spread is like commission for brokers.

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4

Whenever confused just ask yourself, “if my broker isn’t charging me a trade commission then what’s in it for him?” Spread.

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5

This depends on the broker’s trade execution model.

Generally, there are three options:

  1. Broker streams you (the client) a marked-up spread. This means LP(s) provide the broker a “raw” spread and since the broker needs to make money, it “marks it up” and sends you this spread.
  2. Broker streams you the “raw” spread and then charges you a commission. For example, $60 per million traded.
  3. A combination of the first two.

Just like in any transaction where one has to make a profit, there’s always a spread somewhere.

For example, if I bought a pineapple for $10 and now you want it. I’ll sell it to you for $11.

You “hit” my bid price of $11.

The spread here is $1. And I make a $1 profit.

Or I can sell you the pineapple for $10. But then charge you a $1 commission for finding you a pineapple.

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6

I got your point. Thank you.