One of the most important factors to look out for when choosing an FX broker in the UK is overall trading costs. Trading conditions are changing around the world. Regulators in the developed markets have altered the margin conditions that brokers they regulate can offer. This sparked a race among brokers to offer smaller and smaller spreads to attract clients.
The significance of these changes in the regulatory framework is that the cost of opening and operating a Forex account in these jurisdictions has skyrocketed. Traders operating in the UK, US and EU now need 5-digit sums as initial capital. When you are trading with such large amounts of money on limited leverage, you have to find a way to reduce trading costs by selecting the tightest spreads brokers.
FX trading in the US typically operates on leverage that has been reduced to 1:50, courtesy of the 2010 Dodd-Frank Act. This sets the minimum account opening balance at $25,000 for a US FX broker. In Europe, the European Securities and Markets Authority did the same thing in 2018 by capping leverage to 1:30 for liquid currency pairs and 1:20 for illiquid pairs.
The trading of accounts with large amounts of capital, which used to be very rare in retail trading, is now becoming widespread. Trading with large amounts of money brings with it the ability to open positions with larger lot sizes. This makes it highly imperative to reduce trade costs as much as possible so you can maximize gains.
Trade costs in terms of spreads don’t only come into play when you are trading large accounts. When you are trading assets that are typically not as liquid as other assets, you would want to have these costs reduced. For instance, if you are trading a pair such as the USD//NOK or USD/TRY, one thing you will notice quickly is that these assets carry larger spreads than the most-traded currency pairs such as the EUR/USD or GBP/USD.
Yet, some of these “illiquid” pairs have shown great promise starting in 2020, as the coronavirus pandemic brought uptrade opportunities that have never been seen before in the financial markets.
But how did we get to the point where we see brokers offering spreads that are even less than one pip on certain currency pairs?
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