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Some brokers offer to clients the facility to trade the foreign exchange market via the spot market or via CFDs.

The thing I don't understand is that some currency pairs are offered via both methods. So, in such a case, which method should a trader choose and what are the important factors to consider?

I know how the mechanics of trading via the spot market differ from a CFD market but from the trader's perspective, both methods are leveraged, over-the-counter trades with 0 commissions and the trader only pays a spread.So, it seems to me they are the same.

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CFD stands for Contract For Difference and is an agreement between you and your broker. When the contract is closed the broker promises to pay a certain amount for every pip the bought currency has moved in your favour, if it moved against you it's you who pays the broker. The term comes from the fact that upon closing the position you take the difference between the closing price and the opening price and that money is transferred/deducted to/from your account. It is important to note that at no point you actually physically or virtually possess the bought currency, nor must you deliver the sold currency.

The FX spot market differs from that in the last point: You physically or virtually exchange currencies. This means you receive/pay interest on the bought/borrowed currencies if held overnight. And also this implies that there's no "open position" like in the CFD case (put differently your USD balance doesn't remember if it came about by selling AUDs or EURs). Some platforms, however, have a "close everything" button, i.e. to sell all currencies that aren't your base currencies.

In this regard perhaps even more surprising but depending on your broker, and whether or not they grant you direct market access and, if so, the actual market (ECN), you will trade in lots, that means the quotes you see are only valid for when you trade exact multiples of the lot sizes of the currencies involved (so called even-lot trade). Anything odd needs to be traded in an odd lot order for which there's either a surcharge or wider spreads.

  • Why would odd-lot orders have wider spreads? Are they not processed by the same matching engine that processes the even-lot orders? – dg99 May 8 '15 at 23:00
  • @dg99 Can't speak for all platforms but HotspotFX has a minimum size of 5 lots and a surcharge for odd lots (but not mixed lots) whereas Currenex has no minima or surcharge of any kind. Wider spreads was a guess for dealer-brokers that hide their fees in the quote spreads. – hroptatyr May 9 '15 at 7:51

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protected by Community May 21 '15 at 15:51

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