Spread cost
Family IV · Costs
Not to be confused with spread, forex spread, good spread.
Spread cost is the implicit transaction cost embedded in every quote, equal to the bid-ask spread multiplied by the size of the position. It is not charged as a separate fee; it is realised the moment a position is opened and would be closed at the same quote. Because it is embedded in the price, it appears on every trade regardless of whether a commission is also charged.
How it is calculated
The spread cost for a single round turn is the difference between the ask and the bid, multiplied by the number of units traded. For a long position, the entry is at the ask and the exit at the bid; for a short position, the entry is at the bid and the exit at the ask. In both cases the spread is paid once per round turn.
Spread cost is distinct from commission and from slippage. Commission is an explicit charge; slippage is the difference between the expected price and the executed price. Spread cost is the part of the cost that is known before the trade is placed, provided the quote does not change.
Worked example
A trader buys 10,000 units of a currency pair quoted with a bid of 1.1050 and an ask of 1.1052. The spread is 0.0002, or 2 pips. The spread cost is calculated as follows.
The result is expressed in the quote currency of the pair. If the quote currency is not the trader's account currency, the figure is converted at the prevailing rate.
Factors that change it
Spread cost varies with the instrument, the size of the position, and market conditions. It is typically wider in less liquid instruments, around scheduled news releases, and outside the main trading sessions of the relevant market. Some brokers offer variable spreads that widen during volatile periods, while others advertise fixed spreads that may be wider on average. The exact spread at any moment is determined by the liquidity provider or the broker's dealing desk, and the method of calculation can differ between account types and jurisdictions.
Often confused with
- spread
- Spread is the raw difference between the bid and the ask, while spread cost is that difference multiplied by the position size; the visible sign is that spread is quoted in pips or price terms, whereas spread cost is a monetary amount.
- forex spread
- Forex spread refers specifically to the bid-ask difference in a currency pair, while spread cost is the monetary cost of that spread applied to a position; the visible sign is that forex spread is expressed in pips of the quoted pair, whereas spread cost is expressed in a currency amount.
- good spread
- A good spread is a qualitative judgement that a spread is narrow relative to the instrument's normal range, while spread cost is the quantitative monetary amount paid; the visible sign is that good spread describes the quote itself, whereas spread cost describes the money lost on a trade.