Spread only pricing and commission pricing

The same trade, two invoices 

A round turn is a position opened and then closed: two dealings, one exposure, and the unit in which the cost of trading is normally counted. Every explicit charge a broker makes for that round turn is arranged in one of two ways, and the arrangement is a property of the account rather than of the market. In the first, the whole charge sits inside the quote. The bid on the screen is a little lower than the best bid the firm can source and the ask a little higher than the best ask, and nothing further is billed. The statement shows an opening price, a closing price and no separate charge at all. In the second, the quote reaches the screen with no markup or with a smaller one, and the firm bills a stated fee for each dealing. The statement shows an opening price, a closing price and two explicit debits, one for each side of the round turn.

Nothing else separates them. The instrument, the contract size convention and the exposure are identical, and the market underneath makes no distinction between the two. The difference is entirely in where the charge is written down, which is also what makes them hard to compare: a cost folded into a price is visible as a number nowhere, and a cost billed as a line item is.

How a spread only account embeds the cost in the quote 

A dealing desk receives two way prices from its liquidity sources: a best bid and a best ask, which together are the raw spread. Under a spread only arrangement the desk applies a markup to that pair before it reaches the screen. The bid is moved down, or the ask is moved up, or both, by an increment the firm sets per instrument. What arrives on the screen is a single pair of prices with the firm's charge already inside it, and by inspection it is indistinguishable from the prices underneath it. How a desk assembles a quote from its sources is set out in the guide on how a spread is formed.

Three consequences follow from that construction, and all three are mechanical rather than matters of opinion. The charge is paid at the moment of dealing, because a position opened at the ask and closed at the bid crosses the whole spread once, and the markup is inside the spread it crosses. The charge is denominated in the instrument's own unit of price movement rather than in currency, so its money value falls out of the contract size and the value of a pip instead of out of any figure the firm publishes in an account currency. And the charge is itemised nowhere: no line on the statement is labelled cost, which is how a spread only account can appear, on a statement, to have been free.

How a commission account separates the quote from the charge 

The commission arrangement takes the markup out of the quote and charges it as a fee instead. The prices on the screen are the raw spread, or something close to it, and a stated amount is debited for each dealing. The convention in most retail arrangements is an amount per lot and per side, so a round turn in one lot is charged twice, once when the position opens and once when it closes. Some arrangements price the fee on notional value instead, as an amount per unit of currency turned over. That is a different basis rather than a different number, and it cannot be restated per lot without knowing the contract size, which is why the two are not comparable as published.

The consequences mirror the previous set, point for point. The charge is explicit, so it appears as its own line and can be totalled for a day or a month without reconstructing anything from fill prices. It is fixed in currency per unit of size, so it does not move when the spread moves, and it is the one part of the cost of a round turn that is known before the dealing happens rather than after. And it scales in a straight line with size, which is the property most often misread: because the fee is charged per lot, doubling the position doubles the commission exactly as it doubles the spread cost, so size on its own never changes which of the two arrangements is cheaper.

Putting the two halves back together 

Neither published number is comparable on its own. A spread cannot be set against a commission, because one is quoted in pips and the other in currency, and an account with a narrower spread and a fee is not automatically cheaper than an account with a wider spread and none. The comparable quantity is the all in cost of one round turn, expressed in the account currency for a stated instrument at a stated size: the spread converted into money, plus the commission on both sides.

The conversion is one multiplication each way. Spread in pips multiplied by the value of one pip for the size dealt gives what the spread costs for the round turn, because the round turn crosses the spread once. Commission per lot per side multiplied by the number of lots and then by two gives what the fee costs, because a round turn has two sides. The two totals add. Everything else a position can be charged, financing on an overnight hold, any conversion into the account currency, and any distance between the price requested and the price filled, sits outside this arithmetic entirely and is not what either pricing model describes.

The commission arrangement came out lower there, and the margin came from exactly one place: the markup embedded in the first arrangement's quote was wider than the fee the second one charged. Nothing else in the comparison did any work. That is worth stating plainly, because it means the ranking is not a property of the two models at all. It is a property of the particular numbers put into them.

Two things are visible in those three cases that a headline spread cannot show. The ranking turns on the size of the markup relative to the fee, and on nothing else in the arrangement. And the all in cost is the amount a position has to recover before it is flat, so a change of pricing model moves the price at which a round turn breaks even without moving the market by a single tick.

Where YAL's own arrangements sit 

YAL operates both models rather than choosing between them. The spread only arrangement carries a typical EUR/USD spread of 0.8 pips with commission of $0. The arrangement that separates the two carries a typical EUR/USD spread of 0.1 pips with commission of $3.50 per lot, per side. Those are the two ends of the same trade off written into account terms: a wider quote with nothing billed, or a narrower quote with a stated fee on each side. The terms of every tier, including those priced on notional turned over rather than per lot, are set out on the accounts page.

Where practitioners disagree 

The argument for separating the charge is transparency, and it is a real one. A commission is a number that can be read, totalled and audited. A markup is the difference between a price shown and a price never shown, and no statement discloses it, so a client of a spread only arrangement cannot recover from any record what the firm charged. Desks that price this way argue that the quote then belongs to the market rather than to the firm, and that a service charged for openly is a cleaner arrangement than one recovered invisibly.

The argument against is that transparency and cheapness are different properties and the industry routinely conflates them. A visible fee is not automatically a smaller one, and the worked cases above show a markup landing on either side of a fee depending only on where it is set. A spread only quote also requires no arithmetic to compare across firms and nothing to reconcile at the end of a month. The counter to that, in turn, is that a comparison requiring no arithmetic is usually a comparison of the wrong quantity, since the number being compared is one component of a cost rather than the cost.

A narrower disagreement concerns how a fee is applied at small sizes. Where an arrangement charges strictly pro rata, a fractional lot carries a fractional fee and the ranking established at one size holds at every other. Where an arrangement applies a minimum charge per dealing instead, small sizes carry proportionally more of it and the ranking can turn. Which of the two an arrangement does is a term to be read in its contract specifications rather than an assumption safe to carry across from another firm.

The last disagreement is about the word raw. A raw spread is the best bid and the best ask a firm's pool is showing, so it is variable by construction and can widen sharply when liquidity thins. A marked up quote is that same variable pair with an increment added, so it inherits every widening the raw pair has and then sits outside it. Neither is a fixed spread, and an arrangement that genuinely fixes a spread is a third thing, priced differently again. Practitioners who quote long run averages and practitioners who quote behaviour under stress are describing the same account and reporting different things, which is why headline spread comparisons between firms so often fail to reproduce.

What survives all of it is the arithmetic. Two arrangements can only be set against each other once both have been reduced to an all in cost for a stated instrument at a stated size, and a headline spread set against a headline spread, when one of the two carries a fee and the other does not, compares nothing.