CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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How to Pick the Best FX Broker in the UK?

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?

The Evolution of Low Spread Trading

Spreads exist because the Forex brokers have to get pricing from the major banks, and pass these on to the consumer at a price that will enable them to make profit. The Forex broker acts as a middleman in this transaction.

There used to be a time when the spreads on the most liquid currency pair, the EUR/USD, used to be 3 pips. Spreads began to shrink in the middle of the first decade of the 2000s. Spreads began to be squeezed further when forex brokers developed a 5-digit pricing system which enabled them to develop fractions of the smallest divisions of forex price movement known as the pip. 

These fractionated pips or pipettes, allowed forex brokers to offer more precise pricing. Instead of just passing on whole number prices to their clients, they could pass on more precise fractions of prices. Instead of offering a forex pair at, say, 0.3485, they could now offer these at 0.34851, up to 0.34859, before getting to the next price of 0.3486. In the old days, they could only move from 0.3485 to 0.3486. 

As boundaries kept being pushed and MT4 brokers began to compete for clients, some brokers decided to offer accounts that came with very tight spreads or zero spreads. This was possible because the brokers found new ways to make money from the activity of their clients. 

They could either add commissions to the trades, or they could assume counterparty positions and earn money from the “B” liquidity book. Either way, these actions enabled brokers to offer the narrowest spreads possible to their clients. For traders looking to cut costs, low spreads became an important consideration when choosing Forex brokers. 

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Keys to Trading the Tightest Spreads

If you want to trade the tightest currency spreads, there are additional trade behaviours you must display to keep your tight spreads even tighter. No matter how tight an MT4 broker’s spread is, there are certain things that cause spreads to increase. Some of these are as follows:

  • Exotic pair trading. Exotic currency pairs don’t have tight spreads. It’s just their nature as they are illiquid.

  • Trading at times when there is a low market participation, such as when the trading week has just opened or when a market is about to close.

  • A period of extreme market volatility, usually when a big event is happening in the world which causes a sudden rise in demand or supply of an asset. At these times, market makers will be hard pressed to ensure that the prices that they have acquired are not passed on to their clients at a loss. They do this by swiftly changing prices to meet the higher rate of price changes, and you may have to pay a wider spread as a result.

Remember that spreads are the tightest when an asset exists in large volumes to make them liquid. The rules of demand and supply apply to trading as well. Therefore, trade liquid assets as much as possible, and trade when there is market overlap, which guarantees the largest trade volumes that provide an environment to keep spreads low.

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Looking for the Best UK Forex Broker With Tightest Spreads?

What should you be looking out for when trading with a UK forex broker in terms of getting spreads that are as tight as possible? 

Use an FCA-regulated broker with tight spreads. One way to ensure that you are trading with a UK FX broker with the tightest spreads is to check where the company is getting its liquidity from. If the FX broker is getting its liquidity from some of the major banks that control the Forex volumes at the interbank market, you can be sure that the broker will get enough liquidity to give you the tightest spreads possible. The more liquidity is available, the lower the trading cost, spreads, will be.

US FX Broker With the Tightest Spreads

In the US, you need at least $25,000 to open a Forex account. The regulator of the Forex market in the US, the Commodities and Futures Trading Commission (CFTC), is very particular about traders being treated fairly by their brokers. 

Trading with the tightest spreads which don’t widen unexpectedly is something that US traders want. ThinkMarkets is a reliable Forex broker that offers some of the tightest spreads in the industry, and also provides trading conditions that match the standards set out by the CFTC.


What Traders Are the Tightest-Spread Brokers Suited for?

Position traders tend to leave their positions open for months. They can afford not to care about what the spreads incurred on their trades are. If you are a trader on the institutional side of the market where a single trade can be worth 10,000 lots, the spread is an absolutely big deal. Imagine setting up a trade where 1 pip is equivalent to $100,000; would you choose a broker that can’t offer the tightest spread possible?

Day traders and scalpers would also be able to see the tightest spread brokers as life savers and not as enemies. Trades taken by scalpers and day traders don’t last very long. This means that trading ranges are lower. This requires that spreads are kept as low as possible so as to maximize profits.

ThinkMarkets is one of the best UK Forex brokers with the tightest trading spreads. With Thinkmarkets, you also get some of the best trading conditions. The live trading servers on the ThinkMarkets MT4 are very fast, guaranteeing speedy executions with very few episodes of requotes. This ensures that your spreads stay very tight and don’t widen even during high-impact news events.


Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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