Why “Cheap” Trading Costs May Not Mean Better Execution

Raw Spread vs Tight Spread is a distinction many retail traders overlook. Most traders focus on the visible spread and commission shown in marketing materials. However, price structure, liquidity depth, and execution mechanics determine the real cost of trading. Tight pricing is not automatically superior pricing. Understanding the structural difference between Raw Spread and Tight Spread reveals where risk may actually reside.

Why Traders Obsess Over Tight Spreads

Retail trading education often emphasizes cost minimization.

Lower spread means less cost per trade. Lower commission means higher retained profit.

This logic appears straightforward.

However, focusing exclusively on visible cost ignores the economic structure that supports that pricing.

If pricing appears unusually cheap, someone must absorb the difference.

The question becomes: who?

What Is a Raw Spread?

A Raw Spread refers to pricing that reflects the underlying liquidity provider quotes without artificial smoothing or compression.

In a Raw Spread model:

• Pricing fluctuates according to interbank liquidity • Spreads widen during volatility • Commission is charged separately • Depth varies by size

For example, if interbank EURUSD liquidity shows 0.3–0.4 pips, a Raw Spread broker may pass through that range and add commission.

Raw does not mean always tight.

Raw means structurally transparent.

What Is a Tight Spread?

A Tight Spread refers to a consistently narrow bid-ask differential displayed to the trader.

For example:

EURUSD at 0.0–0.1 pips.

However, Tight describes the appearance of the spread, not necessarily its origin.

A Tight Spread can exist in:

• Fully externalized routing • Hybrid routing • Internalized B-Book environments

Tight is a surface characteristic.

Raw describes underlying pricing structure.

These are not interchangeable terms.

The Arithmetic Behind Pricing

Consider simplified cost arithmetic.

If wholesale interbank spread averages 0.3–0.4 pips and a broker advertises 0.1 pips plus very low commission, economic questions arise.

A broker must cover:

• Liquidity provider cost • Infrastructure • Technology • Compliance • Profit margin

If retail pricing appears consistently below wholesale reference, margin must be sourced elsewhere.

That “elsewhere” may involve internalization or exposure netting.

This is not an accusation. It is arithmetic.

Price compression without offset must be economically justified.

The Size Test Nobody Talks About

Many traders evaluate spread only at micro-lot size.

At 0.01 lot, spreads may appear fixed and tight.

However, increasing size to 0.5 or 1.0 lot often changes behavior:

• Spread widening • Slippage increase • Partial fills • Delayed execution

This occurs because visible spread is not equal to executable depth.

Liquidity depth determines how much size can transact at the quoted price.

Testing at multiple lot sizes often reveals structural routing behavior.

Spread vs Depth: The Hidden Variable

A narrow spread with shallow depth can be more expensive than a wider spread with strong depth.

If you receive 0.1 pip spread but experience 0.5 pip negative slippage, effective cost exceeds headline cost.

True transaction cost equals:

Spread + Commission + Slippage.

Marketing emphasizes the first two.

Execution reality includes the third.

Depth matters more than display.

Commission Arithmetic and Incentive Alignment

Many traders assume lower commission equals safer trading conditions.

However, commission must be evaluated relative to routing structure.

In a fully A-Book model, broker revenue depends on volume, not client losses.

In a heavily internalized model, broker revenue may correlate with client loss distribution.

Low commission combined with compressed spread can shift where economic margin originates.

Cost visibility and incentive alignment are separate variables.

Cheap does not automatically mean aligned.

Slippage Asymmetry as a Signal

In an ideal market, slippage distribution over time should be statistically balanced.

Positive and negative slippage should occur in proportion to volatility.

Persistent negative slippage under certain conditions may indicate routing asymmetry.

This does not automatically imply manipulation.

It reflects structural risk management design.

Execution data provides more insight than headline spread.

When Cheap Means Internalized Risk

If pricing is consistently tighter than wholesale reference and commission remains minimal, exposure must be absorbed internally.

Internalization is not illegal.

However, internalization shifts counterparty risk dynamics.

If a broker profits primarily when traders lose, incentive alignment differs from pure transaction models.

Understanding this dynamic is structural awareness.

Counterparty risk increases when pricing and revenue logic disconnect from wholesale economics.

Why Professionals Often Prefer Transparent Cost

Professional traders often accept realistic spread and commission if pricing behavior reflects genuine liquidity.

Transparent cost means:

• Spreads widen logically during volatility • Slippage reflects market depth • Pricing varies with size • Commission aligns with liquidity tier

Predictable transparency reduces uncertainty.

Artificial stability can conceal structural risk.

Professionals prioritize structure over appearance.

The Uncomfortable Truth

Most retail traders lose money regardless of routing structure.

For the majority, A-Book vs B-Book may not materially change outcome.

Execution structure becomes relevant when profitability becomes consistent.

If a trader remains statistically unprofitable, routing model is secondary.

If profitability emerges, structural alignment begins to matter.

Understanding Raw Spread vs Tight Spread reduces illusion.

It does not replace discipline.

Structure clarifies cost.

Discipline determines survival.

Internal Links

A-Book vs B-Book Explained Why FX Brokers Make Money What Is a Prop Firm Challenge? Best Prop Firms How to Get Funded Without a Challenge Free Prop Firm Free Trading Journal

FAQ

What is the difference between Raw Spread and Tight Spread?

Raw Spread reflects underlying liquidity provider pricing. Tight Spread describes the visible narrow bid-ask display, which may or may not reflect wholesale liquidity depth.

Is a tight spread always better?

Not necessarily. Execution quality, slippage, and liquidity depth determine real trading cost.

Why would a broker offer pricing below wholesale reference?

Internalization or hybrid routing structures may offset wholesale costs through exposure netting.

Does low commission reduce risk?

Commission level alone does not determine routing structure or counterparty alignment.

How can I test execution quality?

Evaluate spreads at multiple lot sizes, track slippage distribution, and observe behavior during volatility spikes.

Should profitable traders care about routing?

Yes. Structural routing becomes more relevant as profitability increases and exposure grows.