Hi,
Background:
Many brokers that offer variable spreads increase their spreads during/just before news. Some increase by much (like Oanda, as much as 20 pips). I don't trade news. I hold trade from a day to a few days and the widened spreads really bother me. If I hold trade that last more than a day and with at least 1 (sometimes up to 3) major news announcment everyday, from time to time unavoidably I will find that the market price is close to my stoploss, like just 10 pips away from the market price. The problem is that when spreads increase just before the news, my SL is taken out instantly. I am very annoyed by this because sometimes there is no real market action trading at my SL price, but my SL is taken out by the widen spreads BEFORE the NEWS. Because of this I think about the BID/ASK mechanism when spreads are widened and can brokers take advantage of this and take your money this way? I think it's pretty interesting and if you are interested please read on.
The BID/ASK mechanisms when spreads are widened:
Suppose I placed a long trade on Monday for GBP/USD at 1.9950/1.9955 with a SL of 40pips. On tuesday, the market price has moved to 1.9920/1.9923 just before a major British news annoncement like the interest rate meeting. Nothing special here, only that the market price is getting close to my SL. Now the broker increases the spread from 1.9920/1.9923 to 1.910/19930 for a minute before the news annoncment. No need to say my stop loss is being take out as bid has drop to 1.9910, below my SL at 1.9915 (1.9955 minus 40 pips). Then the news is annoncement and there is a GBP rate hike and price jumps to 2.0000 in 2 minutes and you notice that brokers that offer fix spreads showed that the bid price is only as low as 1.9920 as they didn't widen their spreads just before news and their clients don't get stopped out like me.(in another words, these fixed spread brokers didn't frustrate their clients who already hold positions, but probably frustrate those who don't have positions but to jump in to trade news and then getting requotes/platform freeze.
Now here is the interesting thing. CAN THEY STEAL MONEY THIS WAY, giving a good name of "widened spreads?)
THE SCENARIO:
My SL loss is taken out at 1.9915 in the above example. Under normal circumstances for a price to be reached it will move through each price level. When spreads is widened to 1.9910/1.9930 in the above example, the broker will indicate in my account that my SL is taken out at 1.9915 because of the widened spreads, and they can PROFIT by either a) immediately re-sell my SL sell at their higher sell price at 1.9930 (a 15-pip difference) and profit the difference, or re-sell/pass my order to the interbank market at the current interbank price at 1.9223 (a 8-pip difference) also profiting the difference.
Now if the news is relatively calm and the market price barely moves, imagine how much the broker profits just by benefiting the stops being taken out in between their widened spreads (Oanda sometimes has 25 pips spread and sometimes crazy 30-pips spread) and re-sell those SL to the wide end of either bid/ask price? (if you don't quite get it please read the post again as they really can make money this way and it's like another form of stop hunting).
Background:
Many brokers that offer variable spreads increase their spreads during/just before news. Some increase by much (like Oanda, as much as 20 pips). I don't trade news. I hold trade from a day to a few days and the widened spreads really bother me. If I hold trade that last more than a day and with at least 1 (sometimes up to 3) major news announcment everyday, from time to time unavoidably I will find that the market price is close to my stoploss, like just 10 pips away from the market price. The problem is that when spreads increase just before the news, my SL is taken out instantly. I am very annoyed by this because sometimes there is no real market action trading at my SL price, but my SL is taken out by the widen spreads BEFORE the NEWS. Because of this I think about the BID/ASK mechanism when spreads are widened and can brokers take advantage of this and take your money this way? I think it's pretty interesting and if you are interested please read on.
The BID/ASK mechanisms when spreads are widened:
Suppose I placed a long trade on Monday for GBP/USD at 1.9950/1.9955 with a SL of 40pips. On tuesday, the market price has moved to 1.9920/1.9923 just before a major British news annoncement like the interest rate meeting. Nothing special here, only that the market price is getting close to my SL. Now the broker increases the spread from 1.9920/1.9923 to 1.910/19930 for a minute before the news annoncment. No need to say my stop loss is being take out as bid has drop to 1.9910, below my SL at 1.9915 (1.9955 minus 40 pips). Then the news is annoncement and there is a GBP rate hike and price jumps to 2.0000 in 2 minutes and you notice that brokers that offer fix spreads showed that the bid price is only as low as 1.9920 as they didn't widen their spreads just before news and their clients don't get stopped out like me.(in another words, these fixed spread brokers didn't frustrate their clients who already hold positions, but probably frustrate those who don't have positions but to jump in to trade news and then getting requotes/platform freeze.
Now here is the interesting thing. CAN THEY STEAL MONEY THIS WAY, giving a good name of "widened spreads?)
THE SCENARIO:
My SL loss is taken out at 1.9915 in the above example. Under normal circumstances for a price to be reached it will move through each price level. When spreads is widened to 1.9910/1.9930 in the above example, the broker will indicate in my account that my SL is taken out at 1.9915 because of the widened spreads, and they can PROFIT by either a) immediately re-sell my SL sell at their higher sell price at 1.9930 (a 15-pip difference) and profit the difference, or re-sell/pass my order to the interbank market at the current interbank price at 1.9223 (a 8-pip difference) also profiting the difference.
Now if the news is relatively calm and the market price barely moves, imagine how much the broker profits just by benefiting the stops being taken out in between their widened spreads (Oanda sometimes has 25 pips spread and sometimes crazy 30-pips spread) and re-sell those SL to the wide end of either bid/ask price? (if you don't quite get it please read the post again as they really can make money this way and it's like another form of stop hunting).