Spread vs commission — real trading costs at your broker

Marek opened an account with a domestic market maker because the homepage promised "zero commission". Six months of scalping EUR/USD later, he worked out that his average round-turn cost had been 14 USD a trade — while a friend running the same strategy on an ECN account abroad had been paying nine. Multiplied by 70 trades a month, the gap came to 350 USD a month, or over 4,000 USD a year. Marek was not losing money on his strategy. He was losing it on a misunderstanding of how the real cost of a trade is actually counted. This article takes both models apart, shows when a market maker is genuinely cheaper than an ECN, when it is not, and lists the five mistakes most retail traders make.

What spread really is

The spread is the difference between the buy price (ask) and the sell price (bid) of the same instrument at the same moment. If EUR/USD is quoted at 1.08500 bid and 1.08515 ask, the spread is 1.5 pips. That is the real cost of opening the trade — the moment you enter the market your position is already showing a loss equal to the spread, because you bought at a price higher than the price at which you could immediately sell. To break even, the market has to move 1.5 pips in your direction before any profit at all begins to accrue.

The spread is baked into the quote — the broker does not list it as a separate line on your account, unlike commission. For that reason it is often called a "hidden cost", though in truth it is perfectly visible to anyone who knows where to look. On a pair quoted against the dollar (EUR/USD, GBP/USD, AUD/USD) one pip is worth 10 USD on a standard lot. On cross pairs and on instruments such as XAU/USD the pip value is calculated differently and is worth confirming with your broker before placing the first trade. A related puzzle that catches many traders off-guard: why the profit on a closed position is lower than the price move multiplied by the lot size — the article on why my profit is smaller than the price move times position size explains the mechanics in full.

What broker commission really is

Commission is a fee charged on opening and again on closing a position, scaled to the volume in lots. The most common rate at ECN brokers is 3 to 3.5 USD per lot per side, which is 6 to 7 USD round-turn (a full open and close). Some prop-firm and institutional brokers go as low as 2.5 USD per side, but for a retail account funded with up to 50,000 USD it is sensible to take 7 USD round-turn as the working benchmark.

The market-maker model: no commission, wide spread

A market maker (a dealer, the broker B-book model) is itself the counterparty to your trade. When you buy EUR/USD, the broker sells it; when you sell, the broker buys. Your order is not routed to any external venue but kept on the broker’s own book. The market maker’s main source of profit is the spread, and the secondary source is the statistical loss of a portion of retail clients. According to data ESMA requires brokers to publish, between 70 and 80 percent of retail clients lose money over the course of a year — which for a market maker running a B-book is an additional revenue stream on top of the spread margin.

The best-known European market makers include XTB and Plus500. XTB’s Standard account quotes a spread of 0.8 to 1.8 pips on EUR/USD during the European session, with zero commission on currency trades up to a defined volume threshold and 0.2 percent of position value above it. Plus500 uses only fixed spreads, advertising roughly 0.6 pip on EUR/USD at peak liquidity, though the spread widens noticeably at night and around macro releases.

The strength of the model is simplicity — you see one number called "spread" and you know what the trade costs. The weakness is opacity around fills during sharp moves: a market maker can widen the spread, delay execution or request a requote. Under normal conditions, for traders placing a handful of trades a week and using modest leverage, the model is perfectly serviceable.

The ECN model: raw spread plus commission

ECN stands for Electronic Communication Network. In this model the broker is not your counterparty — it aggregates quotes from a dozen or more liquidity providers (bank dealers, but also prop firms and other ECNs) and shows you the best available bid and ask. The most prominent ECN brokers available to European clients include IC Markets, Pepperstone, FP Markets and Tickmill. The EUR/USD spread during the European session can drop to 0.0 pip, with an average between 0.1 and 0.3 pip. The price you see is very close to the one currently quoted on the interbank market.

The cost of that transparency is the commission. At IC Markets on the Raw Spread account it is 3.5 USD per side, or 7 USD round-turn. At Pepperstone on the Razor account it is essentially identical: 3.5 USD per side. Some brokers vary the rate by instrument — XAU/USD and indices usually carry a lower commission than currencies, and the difference is worth confirming before opening the account.

The maths of the comparison: when each model wins

The break-even between the two models is set by a simple formula: the ECN commission expressed in pips. On a USD-quoted pair, 7 USD of commission corresponds to 0.7 pip. Add that to the average raw ECN spread (say 0.2 pip) and the total ECN cost in pips is 0.9 pip. If your market maker offers an average spread below 0.9 pip, it is cheaper. If higher — the ECN wins.

In practice the threshold sits closer to 1.3 to 1.4 pips, because the "from 0.6 pip" headlines advertised by market makers translate, on average, into 1.0 to 1.5 pips during the hours most retail traders actually trade. The higher your monthly volume, the more pronounced the ECN advantage becomes, because the commission is linear in the number of lots while the market-maker spread tends to widen on larger orders.

When the market maker is actually cheaper

There are three specific situations in which a market-maker account beats an ECN on cost.

• A micro account below 1,000 USD. Most ECN brokers impose a minimum commission — 0.50 to 1 USD per side regardless of position size. On a micro-lot (0.01 lot) that minimum is disproportionate to the notional. A market maker scales its spread cost proportionally to volume: 1.5 pips equates to 1.50 USD on a mini-lot and 0.15 USD on a micro-lot.
• A low number of trades a month. If you place five to ten trades a week and your average position is held from hours to days, the ECN commission begins to weigh more heavily than the saving on spread. The break-even sits at around 30 lots a month — below that the market maker is often comparable or cheaper.
• Exotic pairs. On instruments such as USD/TRY, USD/MXN or USD/ZAR the ECN spread can swing between 5 and 50 pips depending on the time of day. The market maker offers a fixed spread (typically 10 to 20 pips), giving a more predictable cost structure where the variance of the spread itself is part of the trade.

When ECN clearly wins

Four situations in which an ECN is unambiguously cheaper and more workable.

• Scalping and day-trading. Scalping strategies require the price to clear the spread in seconds. With a 1.5-pip market-maker spread the great majority of microstructural setups simply cannot be profitable. A 0.2-pip spread plus commission on an ECN gives the scalper 1.3 pips of margin that no market maker will ever provide.
• Trading gold and indices. XAU/USD at a market maker costs 2 to 3 USD of spread — equivalent to 30 to 60 pips at the standard pip value. At an ECN, 0.30 USD of spread plus 7 USD commission comes to 7.30 USD round-turn, which is well under half. For an active gold trader the choice of an ECN means hundreds of euros saved each month.
• Trading around macro releases. Market makers routinely widen spreads three- to ten-fold in the 15 minutes leading up to non-farm payrolls or a Fed decision. A spread that normally sits at 1.5 pips can stretch to 8 to 15 pips. ECN spreads react more mildly — typical widening is 0.5 to 1.5 pips, because the depth of book from liquidity providers absorbs more of the imbalance.
• Volume above 30 lots a month. Beyond that threshold the linear ECN commission is simply cheaper than the proportional market-maker margin, regardless of style. At 100 lots a month the annual gap reaches 5,000 to 8,000 USD.

"Most retail traders die not from bad analysis but from costs they failed to count. The commission you see on the statement is twice as important as the spread you do not see, because it is easier to measure and compare. The professional always starts with a spreadsheet, not with a chart." — Mike Bellafiore, One Good Trade. Inside the Highly Competitive World of Proprietary Trading, John Wiley & Sons, 2010.

Five mistakes that cost retail traders money

1. Comparing advertised spreads instead of average realised spreads. "From 0.8 pip" means a spread that has appeared at least once during the day. The average spread during the hours when you actually trade is often two or three times that figure. Always work from the broker’s historical data, not from the marketing copy.
2. Ignoring the ECN commission and comparing spreads alone. An IC Markets advertisement showing 0.0 pip looks free without context. After 7 USD round-turn commission the real cost is 0.7 pip — still good, but a very different number from "free".
3. Mismatching the account model to the trading style. A position trader placing three trades a month on an ECN account overpays by 50 percent compared with a premium market maker. A scalper placing 300 trades a month with a standard market maker loses 60 percent of the potential edge to the spread. The account must be matched to the strategy, not the other way around.
4. Ignoring ancillary fees. An inactivity fee of 10 USD a month, a 0.8 percent FX conversion on every deposit, a 2 USD overnight swap on each open position — together these line items add 500 to 1,000 USD to the annual bill even for very modest trading.
5. Failing to measure your own cost of capital. If you do not know how much you paid your broker last quarter, you cannot know whether your strategy is profitable. Net profit after commissions and spread is the only figure that matters. A spreadsheet with three columns — date, gross result, broker cost — kept up to date is the cheapest improvement you can make to a trading business.

Summary

The real cost of a trade is the spread plus the commission, measured per round-turn, in actual money — not in marketing taglines. The break-even between a market maker and an ECN sits at roughly 1.4 pips of market-maker spread on EUR/USD. Above that the ECN is cheaper. Below it, the market maker is. For a scalper, a day-trader or an active position trader, an ECN typically saves 2,000 to 5,000 USD a year compared with a standard market maker. For a swing trader placing a few trades a month the gap is negligible and the decision turns on platform quality, customer service and regulation.

The five most common mistakes: comparing advertised spreads rather than averages, ignoring the ECN commission, mismatching the account to the style of trading, neglecting ancillary fees and — most consequential of all — failing to keep a spreadsheet of your own cost of capital. Optimise the broker before you optimise the strategy. Every 1,000 USD spent unnecessarily on spread is 1,000 USD you cannot recover with a correctly placed entry.

Related reading: ECN vs market maker — full mechanics, fixed spread versus variable spread, spread vs commission — how to count broker cost.