Commission models: per-lot vs spread-baked
Distinguish between per-lot commission and spread-baked pricing, and calculate which is cheaper for a given trade.
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Market Foundations + Forex Mechanics
Brokers and Execution
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Distinguish between per-lot commission and spread-baked pricing, and calculate which is cheaper for a given trade.
Two ways brokers charge for the same trade
When you place a trade, the broker has to get paid somehow. They use one of two pricing models, and most brokers offer both as separate account types. Understanding which you're on, and how much it actually costs you, is the difference between a strategy that's profitable and one that's quietly bleeding fees.
Model one is per-lot commission. You see raw, tight spreads — sometimes as low as 0.0 pips on EUR/USD at peak liquidity — and the broker charges a flat fee per lot traded. A typical commission is $3 to $7 per lot per side, so $6 to $14 round-turn for one full lot (100,000 units of base currency). Accounts on this model are usually called 'ECN', 'Raw Spread', or 'Pro' depending on the broker.
Model two is spread-baked. There's no separate commission charge. The broker simply quotes you a wider spread than what the underlying market gives them. Where the raw spread might be 0.1 pip, the broker quotes you 1.3 pips. The 1.2 pip difference is their compensation. These accounts are typically labeled 'Standard' or 'Classic'.
Quick math on a $500 account placing one mini lot (0.1 lots) on EUR/USD. Pip value on a mini lot is roughly $1. On a raw spread account: 0.1 pip spread × $1 = $0.10 spread cost, plus $0.70 commission round-turn ($0.35 per side typical mini-lot rate) = $0.80 total. On a standard account: 1.3 pip spread × $1 = $1.30 spread cost, zero commission = $1.30 total. The raw account is about 38% cheaper on this trade. Scaled across hundreds of trades a month, that's the difference between a viable strategy and a losing one for high-frequency styles.
If you're a swing trader holding for days at a time, the cost difference per trade matters far less than for a scalper. A few extra cents on entry rounds to nothing compared to swap, position size, and trade outcome. Match the account type to your trading frequency, not to whichever marketing page sounds appealing.
Recap: per-lot accounts have tight spreads plus commission, best for active styles. Spread-baked accounts roll the cost into a wider spread, fine for low-frequency styles. Always compute round-turn total.
Knowledge check
Answer before moving on.
1. A broker advertises '0.0 pip spreads on EUR/USD'. What's the most important question to ask before opening that account?
2. On a per-lot account, raw spread is 0.2 pips and commission is $7 round-turn per standard lot. Spread-baked account has a 1.2 pip spread, no commission. For one standard lot of EUR/USD (pip value $10), which is cheaper round-turn?
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