In December 2012, Oanda implemented a change to their spreads by applying dynamic pricing. Their CEO K Duker made reference to it during his Reddit AMA appearance last month. The theory behind dynamic pricing is that spreads are conditioned to be more in line with interbank spreads. This contrasts to static pricing which is generally based on producing a fixed spread based on a mid-point market price.
There are various forms of dynamic pricing. The simplest is that which is used by STP brokers which provide a markup on their pricing. For example, if their banks provide them a best bid or ask spread of 0.5 Pips at 1.30505 X 1.30510, they could add a 1 Pip markup of 0.5 Pip on each part of the quote to create a 1.5 Pip spread of 1.30500 X 1.30515. As the brokers spreads that they receive from the banks changes, the spreads seen by their clients will evolve as well.
In regards to what is best for clients, both dynamic and static have their pros and cons. Dynamic spreads are expected to produce tighter overall pricing, but wider spreads around volatile times and during the dead trading period between 22:00 to 23:00 GMT. Specifically between 22:00 to 22:10 GMT, spreads will be wild as many banks temporarily adjust their pricing for the new trading day (the FX trading day closes at 22:00 GMT/17:00 EST). With static pricing, spreads will typically be fixed with smaller adjustments made during times of volatility. For traders unaccustomed to this behavior, dynamic pricing can be tricky as customers used to seeing a EURUSD spread around 1.0 Pip for the entire day may find it odd to suddenly see a 7 Pip spread at 22:05 GMT when no news is occurring.
In Oanda’s case, the broker has received mixed feedback from clients, with several Forex Magnates readers telling us that spreads have appeared inconsistent and there are concerns of stop hunting and excess slippage. (Public thanks to readers for bringing the issue to our attention) We posed the inquiries to Oanda to gain their comment. Specifically, we wanted to know whether the user complaints are part of a permanent change that Oanda has implemented, or are the result of temporary glitches due to the rollout of the new pricing.
Courtney Gibson, Vice President of Trading at Oanda responded with an explanation that details how their dynamic spreads are calculated. Gibson stated:
Courtney Gibson, Vice President of Trading, OANDA Corp
Based on the above answer, Oanda is backing up the premise that the dynamic pricing has led to lower overall spreads, even though prices have become more inconsistent. While Gibson’s answer is what you would expect Oanda to say, it is interesting that he mentioned that adjustments were previously being made manually. This would in fact lead to prices remaining static for greater periods of time.
If you are using Oanda, we’d love to hear your opinions of the pricing in our comments and whether it has made executions better or worse overall.
In December 2012, Oanda implemented a change to their spreads by applying dynamic pricing. Their CEO K Duker made reference to it during his Reddit AMA appearance last month. The theory behind dynamic pricing is that spreads are conditioned to be more in line with interbank spreads. This contrasts to static pricing which is generally based on producing a fixed spread based on a mid-point market price.
There are various forms of dynamic pricing. The simplest is that which is used by STP brokers which provide a markup on their pricing. For example, if their banks provide them a best bid or ask spread of 0.5 Pips at 1.30505 X 1.30510, they could add a 1 Pip markup of 0.5 Pip on each part of the quote to create a 1.5 Pip spread of 1.30500 X 1.30515. As the brokers spreads that they receive from the banks changes, the spreads seen by their clients will evolve as well.
In regards to what is best for clients, both dynamic and static have their pros and cons. Dynamic spreads are expected to produce tighter overall pricing, but wider spreads around volatile times and during the dead trading period between 22:00 to 23:00 GMT. Specifically between 22:00 to 22:10 GMT, spreads will be wild as many banks temporarily adjust their pricing for the new trading day (the FX trading day closes at 22:00 GMT/17:00 EST). With static pricing, spreads will typically be fixed with smaller adjustments made during times of volatility. For traders unaccustomed to this behavior, dynamic pricing can be tricky as customers used to seeing a EURUSD spread around 1.0 Pip for the entire day may find it odd to suddenly see a 7 Pip spread at 22:05 GMT when no news is occurring.
In Oanda’s case, the broker has received mixed feedback from clients, with several Forex Magnates readers telling us that spreads have appeared inconsistent and there are concerns of stop hunting and excess slippage. (Public thanks to readers for bringing the issue to our attention) We posed the inquiries to Oanda to gain their comment. Specifically, we wanted to know whether the user complaints are part of a permanent change that Oanda has implemented, or are the result of temporary glitches due to the rollout of the new pricing.
Courtney Gibson, Vice President of Trading at Oanda responded with an explanation that details how their dynamic spreads are calculated. Gibson stated:
Courtney Gibson, Vice President of Trading, OANDA Corp
Based on the above answer, Oanda is backing up the premise that the dynamic pricing has led to lower overall spreads, even though prices have become more inconsistent. While Gibson’s answer is what you would expect Oanda to say, it is interesting that he mentioned that adjustments were previously being made manually. This would in fact lead to prices remaining static for greater periods of time.
If you are using Oanda, we’d love to hear your opinions of the pricing in our comments and whether it has made executions better or worse overall.