A raw spread account differs from a standard account in providing the raw interbank spread from liquidity providers (the tightest possible spread) in return for charging a small commission. A standard account charges no commission, which is offset by a markup in the spread from the liquidity providers.
These two ways of charging forex investors are the most significant difference between a standard account and a raw spread account (also known as a zero spread or ECN account). As the most popular types of forex accounts, we will focus on them in this article to help you decide which option to select over the long term.
What Are the Distinctive Features of a Standard Forex Account?
Standard forex accounts are also known as market maker or fixed spread accounts, which point to characteristic features of this type of account.
A fixed spread account generally uses maker market execution, where the broker operates as a counterparty to the trader, matching the trader’s order internally or with other traders in their network. These market makers provide liquidity in the market and allow trades to be executed even when liquidity is low.
A market maker account generally offers wider spreads than an ECN account; these wider spreads compensate brokers for providing liquidity to traders in their capacity as a counterparty.
These spreads are referred to as fixed spreads because the difference between the bid and ask prices stay constant under normal market conditions, hence the name fixed spread accounts. These spreads are usually wider than the raw spreads in the market.
The broker sets these fixed spreads based on the currency pair in question and market conditions on the day. These spreads do not directly reflect interbank market rates; as a result, standard accounts are less transparently priced than zero-spread accounts.
The wider fixed spreads that brokers offer include hidden markups; this lack of explicit commissions makes it extremely difficult to work out the trading costs on your trades. On the other hand, you do not need to calculate the commission on each trade.
Market maker execution on a standard spread account results in higher latency, and the broker may be unable to execute a trader’s order at the requested price. They will requote the trader (offer the trade at a new price, which the trader may accept or reject.
Slippage is also more likely with market-maker accounts. Market volatility or latency in processing orders results in a difference between the requested price and the execution price, leading to a less profitable trade than the trader hoped for.
Other Features for Traders
Standard spread accounts typically offer lower minimum deposit amounts, control over the amount of margin and leverage you want, swaps, and set spreads. It gives access to standard lots of any given currency pair.
Many market maker brokers offering standard accounts furnish their clients with educational resources, research, economic news, and technical analysis that can assist traders in making informed trades.
What Are the Characteristics of a Raw Spread Forex Account?
Raw spread accounts are also known as zero spread accounts or ECN (Electronic Communication Network) accounts. Straight Through Processing (STP), or ECN, execution allows direct trades with the liquidity providers in the market (such as banks, financial institutions, and other traders).
Because the liquidity provided to an ECN account comes directly from interbank liquidity providers, the spreads reflect the state of the market. The pricing is much more transparent: traders can see the bid/ask prices in the market. This “raw” spread allows traders access to the instrument’s underlying pricing without markup.
A raw spread account often allows traders insight into the Depth of Market (DOM) data, showing the number of orders in the market, including the number of buy and sell orders at various price levels. The resulting insight into market liquidity and potential price levels allows traders to make more informed decisions.
Spreads on a zero-spread account are extremely tight, reaching as low as zero pips in times of high liquidity, hence this name for them. Brokers profit by charging a small commission on each trade, typically calculated as a percentage of the trade’s notional value. Alternatively, it may be a fixed fee per lot.
Other Features for Traders
Traders have more insight into their trading costs, and the commission structure is highly competitive due to the minimal spreads they are based on.
The direct access to liquidity providers afforded by a raw spread account eliminates intervention by a dealing desk or market maker, allowing faster execution and greater potential for price improvement. This low latency minimizes the chances of requotes or slippage.
The tight spreads, lower trading costs, transparency in pricing, and rapid execution make zero-spread accounts suitable for high-frequency trading and scalping, which rely on small price movements to profit. However, there are potential downsides in the form of higher commission fees.
A Comparison of Standard and ECN Accounts
Here’s a quick overview of the difference between a raw spread vs. standard account.
Brokers act as market makers to traders using a standard account, whereas a zero-spread account places orders directly with liquidity providers. Fixed spread accounts offer fixed spreads set by the broker, which are usually wider than those on ECN accounts, which derive directly from the bid/ask prices in the market.
Standard accounts have the trading costs built into the wider fixed spreads, and traders generally don’t know the interbank price, whereas raw spread accounts charge a commission on each trade that depends on the trade’s value. As a result, a zero-spread account is priced more transparently.
The Straight Through Processing used by ECN accounts results in faster execution speeds than market maker accounts, reducing the risk of requotes and slippage. This factor makes zero-spread accounts better for high-frequency trading and scalping.
What Are the Risks?
The profitability of both zero-spread and standard accounts can be affected by the pricing levied by the broker. With a fixed-spread account, the fee is unknown, embedded in the wider spread, the broker offers. In contrast, despite transparent pricing, the commissions on every trade made on a raw spread account can lower profits.
These account types are vulnerable to slippage, where the requested price (order price) and execution price differ, potentially resulting in losses. The extremely tight, even zero, spreads the interbank market affords zero-spread accounts make them less vulnerable to slippage than a standard account.
However, periods of low liquidity or high volatility in the market can also result in slippage in ECN accounts.
Despite recommending standard accounts for beginners, they have some other disadvantages:
- The fixed spreads offered by standard accounts mean that the difference between the bid and ask prices stays the same under normal market conditions. However, high market volatility or news of disruptive events can result in the widening of spreads, leading to the risk of slippage or higher trading costs.
- The fixed spreads the broker offers incorporate fees based on the broker’s pricing model. As such, they do not reflect the interbank market rates. Consequently, evaluating true trading costs and pricing fairness is difficult.
- Fixed spread accounts’ single most significant risk pertains to market makers. Because such an account typically involves the broker playing the part of market maker counterpart to the trader, a conflict of interest may arise if the broker’s profitability depends on the trader losing.
- Reputable, ethical brokers strive to maintain fair trade execution. Nevertheless, fixed-spread accounts can experience delayed execution, requotes, or order rejections.
- Zero-spread accounts usually offer very tight spreads, but high market volatility can cause spreads to widen. Such widening can even lead to raw spread accounts offering wider spreads than those seen in standard accounts.
- The trading strategies suited to ECN trading profit off small price movements, taking advantage of the low latency of these accounts. However, platform instability, disruption to data feeds, or internet connectivity problems can negatively affect order execution and trade management, leading to losses.
How to Decide Between Standard and Zero Spread Accounts
The critical factor in deciding whether to choose a standard or an ECN account is what sort of forex trading strategy you wish to pursue.
Choosing by Strategy
A fixed spread account is more suited to traders pursuing a longer-term strategy, such as swing trading or position trading, who don’t need direct access to the interbank market, aren’t trading frequently, and like the convenience of fixed spreads.
On the other hand, an ECN account suits traders who are using a high-frequency or high-volume trading strategy, such as day traders and scalpers. The direct access to liquidity in the interbank market, tight spreads, and rapid execution are much better for these strategies, based as they are on many small price movements.
Choosing by Trade Volume
Comparing these two types of forex accounts based on trading costs is complex, and which one is cheaper often depends as much on the broker you use as on the size of the trade or the frequency of your trading.
The commission-based pricing structure of raw spread accounts is generally better for high-frequency trading. In contrast, the embedded fee in fixed spread accounts is generally more competitive for traders following a low-volume, longer-term trading style.
Choosing by Currency Pair
Another factor to consider is when you will be trading and which currency pairs you want to trade. A standard account suits less liquid times or currency pairs with wider spreads.
Conversely, a zero-spread account suits currency spreads with tight spreads (the majors) and highly liquid markets (chiefly 08:00 to 12:00 EST when the London and New York markets are both open.
A note of caution: your broker’s specific terms and conditions can significantly impact the profitability of trades. Some raw spread accounts offer uncompetitive spreads and commissions. Likewise, some fixed-spread accounts are not suitable for the trading strategy you wish to pursue.
How Do Standard and ECN Accounts Differ?
When evaluating ECN accounts against market maker accounts, it is essential to note that fees and commissions, margin requirements, and maximum leverage permitted, among other factors, differ from one brokerage firm to another. When evaluating which account to select, it is important to factor this in.
- Spreads: a standard account usually has wider spreads than a zero-spread account.
- Pricing Transparency: raw spread accounts are more transparently priced than standard accounts, which do not reveal the underlying bid/ask prices in the market.
- Depth of Market Visibility: raw spread accounts offer far greater DOM visibility than fixed-spread accounts.
- Sources of Liquidity: standard accounts source liquidity from brokers; zero-spread accounts source liquidity from a pool of providers, including banks, other financial institutions, and other traders.
- Execution: ECN accounts typically offer faster execution than market-maker accounts. The swift execution of orders and increased potential for price improvement make them better for strategies such as scalping.
Which of These Types Should a Beginner Trader Select?
Standard forex accounts are generally better for beginners for several reasons (despite the downsides of this type of account).
Because the spreads are fixed, and there aren’t separate commissions to calculate, the pricing model of standard accounts is simpler. With the complexities of raw spread accounts, such as separate commissions, not a part of market maker accounts, they afford beginners a more accessible experience to learn trading basics and hone strategy.
Beginners can then focus on technical analysis, how this applies to market dynamics, and, most importantly, risk management. Owing to the popularity of standard accounts with beginners, brokers provide more educational resources, trading tools, and market analysis to these accounts.
The abundance of educational resources for fixed-spread accounts may be one reason they’re popular with beginners!
A market maker account also generally has a lower minimum deposit requirement, making it more accessible to a novice trader with little initial trading capital to speculate in forex.