Why does the size of the spread vary? | Forex Factory

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Why does the size of the spread vary?

  • #1
  • First Post: Sep 1, 2015 10:30am Sep 1, 2015 10:30am
Why does EUR/GBP (2 pips) have a small spread than GBP/EUR (4 pips) ?

You would also see the same in AUD/NZD vs NZD/AUD provided your brokerage has these pairs.
  • #2
  • Sep 1, 2015 3:27pm Sep 1, 2015 3:27pm
NZD/AUD - also exists
  • #3
  • Sep 2, 2015 12:17am Sep 2, 2015 12:17am
My original title of this post is Maths question but I suppose the moderator find the title "Spread question - Why does the size of the spread vary?" more appropriate and they changed it.

Probably because I didn't express myself clearly in my question.

GBP/EUR and NZD/AUD are not "official" pairs but there are brokers who still offer these pair in b-book (MM) - I believe what they do is that they make the market for these pairs by reversing the original pair prices. There is absolutely NO chance of arbitrage between the pairs because if you inverse the price offered, it is exactly the same. This is the reason why the spreads are different between the pairs, to make sure no one can arbitrage.

I am however curious on the maths side of it, why when you have a pair A/B and you reverse it to B/A, the spread would widened. You can just take the current buy/sell of EUR/GBP and inverse the prices, you will notice the resulting prices have a wider spread

My maths ability is elementary, looking if someone can give a simple answer to my question
  • #4
  • Sep 2, 2015 12:27am Sep 2, 2015 12:27am
This has nothing to do with maths. Brokers run a business and they establish spreads that allow them to encourage traders and still make money. Spreads increase in times of low liquidity so that brokers increase turnover. They increase during news announcements to protect brokers from big moves.
It is simply business.
All you need to concentrate on is - can I make money trading that currency pair.
Cheers, H
  • #5
  • Sep 2, 2015 3:12am Sep 2, 2015 3:12am
If eur/gbp is trading at 0.7000 then 1 pip ($0.0001) is a 0.014% move. The corresponding gbp/eur rate would be 1.4286 and a 1 pip move would equal 0.007% move. So a the spread would need to be about double to be the same in dollar terms. In other words, you are paying about the same trading gbp/eur with 4 pip spread as you are trading eur/gbp with a 2 pip spread as 'pips' are actually worth around twice as much for eur/gbp.

Another way to look at it is that if eur/gbp goes to 0.7100 (100 pip move) the gbp/eur will go to 1.4084 (about 200 pip move).

It's easy to get caught up in pip terms, but like any other investment, it is actually the percentages that count.

Hope this helps
  • #6
  • Sep 2, 2015 3:46am Sep 2, 2015 3:46am
Quoting Agro
If eur/gbp is trading at 0.7000 then 1 pip ($0.0001) is a 0.014% move. The corresponding gbp/eur rate would be 1.4286 and a 1 pip move would equal 0.007% move. So a the spread would need to be about double to be the same in dollar terms. In other words, you are paying about the same trading gbp/eur with 4 pip spread as you are trading eur/gbp with a 2 pip spread as 'pips' are actually worth around twice as much for eur/gbp. Another way to look at it is that if eur/gbp goes to 0.7100 (100 pip move) the gbp/eur will go to 1.4084 (about 200 pip move)....
finally someone who gets my question. Thank you Agro, makes absolute sense to see in term of percent and the value of the spread.

I'm also thinking mathematically speaking, is there an advantage in trading EUR/GBP or GBP/EUR. The pair with the larger spread also always move more than the pair with a smaller spread within the same time period - which is expected. This is the actual question I'm thinking about when I posted the question - is it better to trade the pair with a bigger spread which move more or the pair with a smaller spread which move less.

My gut feelings is there is no advantage in one pair over the other. Any thoughts here?
  • #7
  • Sep 2, 2015 4:11am Sep 2, 2015 4:11am
Quoting shibboleth
{quote} finally someone who gets my question. Thank you Agro, makes absolute sense to see in term of percent and the value of the spread. I'm also thinking mathematically speaking, is there an advantage in trading EUR/GBP or GBP/EUR. The pair with the larger spread also always move more than the pair with a smaller spread within the same time period - which is expected. This is the actual question I'm thinking about when I posted the question - is it better to trade the pair with a bigger spread which move more or the pair with a smaller...
No worries

That will depend on whether the broker updates the spread in real time. If they are a fixed spread MM then you may well find times that the inverse pair is more advantageous to trade and vice versa. As the pair gets closer to parity then the spread should also tend to parity. If e/g is trading at 0.8000 for example the g/e will be trading at 1.25. The corresponding %s for 1 pip will be 0.0125% and 0.008% so the spread ratioa should be 1:1.5625 or 2 pip vs 3.125 pips. If the pair was to go to 0.81 with spread of 2 then you would make 98 pips or 1.225%. g/e will go to 1.2346 so if spread was 4 you make 150 pips or 1.2% so in this case you would have been better off trading e/g. Observe whether the broker changes the spread in real time and if they do not then you could create a spread sheet to determine which pair to use.

In fact since the broker will only quote to 0.00001 then there will almost always be at least a slight advantage to one pair over the other.
  • #8
  • Sep 2, 2015 11:19pm Sep 2, 2015 11:19pm
Quoting Agro
{quote} No worries That will depend on whether the broker updates the spread in real time. If they are a fixed spread MM then you may well find times that the inverse pair is more advantageous to trade and vice versa. As the pair gets closer to parity then the spread should also tend to parity. If e/g is trading at 0.8000 for example the g/e will be trading at 1.25. The corresponding %s for 1 pip will be 0.0125% and 0.008% so the spread ratioa should be 1:1.5625 or 2 pip vs 3.125 pips. If the pair was to go to 0.81 with spread of 2 then you would...
Thanks
  • #9
  • Last Post: Oct 6, 2015 12:55am Oct 6, 2015 12:55am
There are many trading pairs in forex trading all had different spread . Spread is of two types, fix spread and variable spread. On major currency pairs spread is low as 1-3 pips and others pairs had high spread . Gold ,metals and oil had high spread pairs. we can choose the pair according to our needs and analysis. I prefer to trade in major currency pairs so that I have to pay low spread and get profit soon.
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