Realized spread: the cost that actually got paid

[Fairman]

Realized spread: the cost that actually got paid

The quoted spread is a snapshot. The realized spread is what a round trip cost: entry at the ask, exit at the bid, minus whatever the price did in between.

To isolate the cost, compare each fill with the mid-price at the time of the fill. Entry cost is the difference between the fill and the mid. Exit cost is the same measure. Their sum is the realized spread, including any slippage.

Averaged over many trades, it shows the true cost of doing business. It often exceeds the quoted average, because trades cluster in busy moments, when spreads are larger and slippage more likely.

A strategy that trades during news or at the open pays a higher realized spread than the daily average suggests. The quoted figure on the website describes a different day than the one actually traded.

The comparison between brokers should be made on this basis: same strategy, same hours, realized cost. A broker with a lower headline spread can lose to one with a higher spread but better fills.

The measurement needs a reference mid-price series, which a tick recording provides.

Quoted average spread versus realized spread: how big is the gap in the journal?

[Amanhasnoname]

For my scalping on EURUSD, the gap was bigger than I expected when I finally measured it. My broker's quoted average for the pair was around 0.2 pips plus commission, but my realised cost across about 400 trades came out at roughly 0.6 pips plus commission, once I compared each fill against the mid at the moment I sent the order.

Most of the difference came from timing. I trade breakouts, so my entries happen exactly when the book is moving and the spread widens briefly. My exits on targets were close to the quoted spread, while stop exits were often half a pip or more worse.

I ran the same strategy on a demo at a second broker with a slightly higher quoted spread, and its realised cost came out almost identical because its fills during fast moves were better. Since then I always compare brokers on realised cost for my actual trading hours, and I ignore the headline number on their website.

[PTScalper]

For my scalping on EURUSD, the gap was bigger than I expected when I finally measured it. My broker's quoted average for the pair was around 0.2 pips plus commission, but my realised cost across about 400 trades came out at roughly 0.6 pips plus commission, once I compared each fill against the mid at the moment I sent the order.

Most of the difference came from timing. I trade breakouts, so my entries happen exactly when the book is moving and the spread widens briefly. My exits on targets were close to the quoted spread, while stop exits were often half a pip or more worse.

I ran the same strategy on a demo at a second broker with a slightly higher quoted spread, and its realised cost came out almost identical because its fills during fast moves were better. Since then I always compare brokers on realised cost for my actual trading hours, and I ignore the headline number on their website.

Interesting, from my point of view it is important to know what was average size of your broker?

Because 0.6 pips spread for 20 - 50 lots position size is normal, for 2 lots its too much.

[Amanhasnoname]

Fair question, PTScalper, and you are right to ask because it changes the whole picture. My size was small, mostly between 0.5 and 2 lots, so a 0.6 pip realised cost was on the high side for the account I was running, not normal for the size. I would not claim the same number for a desk trading 20 or 50 lots, where the fills clearly work differently and the broker may treat the order flow in another way.

What the 400 trade count showed me was that the spread I cared about was the one at the instant I sent the order, not the average on the website. For small sizes, I found the best improvement did not come from changing broker but from changing when I entered. Avoiding the first couple of minutes after a news release brought my average realised cost down to about 0.45 pips on a sample of 120 trades.

I would be interested whether you see a similar difference between target exits and stop exits at your size. In my log the stops were always the expensive side, and that gap alone was most of my cost problem.