How High is TOO High for FX Commission

by Lawrence Fayman

Wed May 3, 2017


The FX market has grown substantially up to the current volume of 5.3 trillion a day.  Due in part to trading technology evolutions and the substantial growth in volume, the industry as a whole has been able to dramatically reduce spreads and ticket cost. Most traders are well informed that the commission and spreads are part of the cost of doing business. The definition of commission states “a form to an agent for services rendered.” Each firm or component involved in the trade will need to pay fees or commissions for any transactions.  A few examples would include, but are not limited to:

Brokerage – pays transaction fees to the Prime Brokerage, LP’s; and the technology provider to provide streaming quotes to the end client

Client – pays transaction fees to brokerage, the bridge provider, the money manager, the agent or 3rd party vendors to execute the transaction.

The commission (or cost of the trade) that the brokerage attaches to each transaction is passed down to the client. The reason for this is that the brokerage provides a platform or service to the client which enables them to place the trade.  In our current market conditions, as mentioned in the examples provided, brokerages are trying to lower the cost of the commission and spreads to attract a larger client base.  There will always be commissions attached to a trade to cover the cost of the transaction.  With the increase in volume within the retail FX industry, large banks and institutional liquidity providers are more willing to provide even tighter spreads with lower commissions.  In 2005, I can recall commissions for 1 million EURUSD demanded as high as $200 per side (that would of been $20 per lot per side). Now,  we can see how technology has lowered this cost down to a few dollars.

In my opinion, the typical cost of executing an FX trade in the market today with a reputable FX Brokerage can be illustrated in the table below:

  Prime Broker   $2-4 per million depending upon volume
  Prime of Prime   $5-20 per million depending upon volume
  STP Brokerage (with 3 or less LP’s)   $10-40 per million depending upon volume
  STP Brokerage (with 1 LP)   $20 – 50 per million depending upon volume
  DD Brokerage   $0 – $10 per million

 

I have taken into consideration the possible cost each brokerage may have to pay to execute a $1 million transaction.  I believe the cost of the transaction is lower with the Prime Brokers due to the volume and collateral deposited with them.  The smaller the deposit and volume traded, the larger the commission cost. The Dealing Desk brokerage never passes the trade to the liquidity provider, so no commission cost should be incurred or attached. However, please note differences between DD and STP execution. These costs, as mentioned, will be passed down to the client as revenue once the cost of the trade is covered.

A final point to take into consideration: some Retail STP brokerages may not charge commission, as the commission will be added into the spread, also known as ‘mark up’.  A good rule of thumb, every 0.1 pips will equal $10 per million.  If a brokerage offers wide spreads without commission, then it should be understood that a markup has been added to offset the brokerage cost of doing business.  With this information, a trader can quickly determine what type of brokerage he/she may want to work with and what costs he/she finds acceptable for a trading situation.

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