The "Raw Spreads" concept was introduced a few years ago and became a common term used to popularize the ECN accounts. What is a Raw Spread account, and what is the relationship between an ECN account and a Raw Spread account?
The Raw Spread account is an account type that was created for well-capitalized, experienced traders seeking ultra-low and stable spreads. A Raw Spread account's main feature is the spread size. These are ultra-low, and the primary condition that enables the forex broker offering this account type is that the account holder must have a large pool of funds to generate heavy trade volumes. The presence of significant capital enables the trader to generate heavy liquidity and high volumes in trades to justify the low spreads.
ECN accounts are account types in which the trader's orders are fulfilled at the level of the interbank forex market. This is the market segment manned by the banks that act as liquidity providers. The orders fulfilled in this segment are typically huge and could constitute a counterparty risk to a market maker's dealing desk. This is why market makers tend to push these orders to brokers with an ECN platform. The ECN platform is built on a FIX protocol which demands that the heavy liquidity requirements accommodate only high-volume traders. This is something only well-capitalized traders can provide. So for traders who can satisfy the ECN conditions, Raw Spreads are a reciprocal benefit.
Understanding the importance of ECN and Raw Spread accounts requires understanding the pricing mechanism that operates in the forex market. Maintaining liquidity at the interbank forex market, where the banks are operational, requires heavy trading volumes. Traders classified as High-Net-Worth-Individuals (HNWIs) usually have the financial muscle to operate in this market segment, which can be described as the wholesale segment. Most individual FX traders cannot afford the capital requirements required to generate the liquidity to enable them to participate in the wholesale market segment. This is why market makers come into the mix.
Market makers can pick up heavy positions and use these to match their clients' orders at their dealing desks. This is the retail segment of the market. At the retail segment, the prices traders see are usually slightly marked up to cater to transaction costs incurred by the market maker in bringing the positions from the wholesale to retail segments. The spreads are also higher since the transaction volumes are smaller.
The ECN/Raw Spread accounts ensure that the traders with the financial muscle to trade in the wholesale segment are subjected to the market conditions for that market segment. Higher liquidity means that transaction costs can be reduced, resulting in the near-zero spreads found with the ECN/Raw Spread accounts. Operating at the wholesale segment also provides the trader with prices from different banks, giving the trader access to a range of pricing from various liquidity providers. These prices are also lower than what obtains in the retail market segment.
The forex brokers offering ECN/Raw Spread accounts are simply brokers that have provided this account type to give qualifying traders the chance to create liquidity that will eventually result in lower trading costs.
These are the benefits forex brokers offering ECN and Raw accounts provide to their clients.
This calculation seeks to show the advantage that operating a Raw Spread account brings to a high-volume trader over time, as opposed to operating with a Standard spread account. This calculator takes the spreads on a typical broker and shows the difference in trading costs using standard and fixed spread accounts.
A standard spread account shows that the spread on the EUR/USD is 2.0 pips, while the raw spread on the same broker is 0.1 pips. This gives a differential of 1.9 pips. If the trader generates a trading volume of 500 lots per month, the cost of commissions at $3.50 per completed Lot comes to $1,750. This trader would eventually save $7,750 in trading costs.
This calculation shows that using an ECN/Raw Spread account is the most beneficial pathway to trading for traders who trade very high volumes in the forex market.
ECN and Raw accounts are created to benefit the heavy volume traders and provide a reciprocal benefit for their business. They benefit the broker in terms of the heavy volumes they generate, which helps to add liquidity to the market. They also benefit the traders who can save money despite having higher transaction volumes than regular traders on standard spread accounts. The list shows the forex brokers offering ECN/Raw Spread accounts. If you qualify to operate this account, pick a broker from this list and move on to open your account, so you start enjoying the benefits of reduced trading costs.