

EUR/USD spread patterns and history, 20032009 
Written by Forex Automaton  
Tuesday, 08 June 2010 11:52  
This article begins a series dedicated to forex spread (to be defined below as half the difference between bid and ask prices). In the series, a separate article will be dedicated to every forex pair we track. The issues of interest are evolution of spread in time, stability of spread during the day and week, and existence of predictable patterns in spread. Data from a popular nonECN broker are used. The algebra of profit and loss in trading on a margin (follow the link for details) has been discussed before. The same notation is used here. If total trading capital is C, its increment per time step of the system (day for Danica system) is dC, then
where p is current price quote, dp is its increment during the time step, a is stoploss placement as a fraction of price quote, and k is fraction of capital to be lost in the event a stoploss is triggered. Note that cost of capital is also ignored, and leverage does not appear in Eq.1 unless one becomes concerned with the cost of capital. This formula assumes that all trades are long but I will keep it that way since the difference between long and short trades in forex is immaterial for this discussion. Eq.1 also ignores spread (assumes it is zero). If spread s is nonzero, dC/C becomes
Here s_{1} and s_{2} are spreads when opening and closing the trade, respectively. Obviously s is always greater than zero and therefore it always works against the trader. Note that s enters only as a ratio to price (relative spread). Therefore spread in pips has to be divided by the typical price level in order to compare profitabilities of trading strategies applied to different forex pairs under realworld conditions. In this study, I use data from a popular nonECN forex broker, aggregated with an hour step, for years 2003 through 2009. The spread is aggregated in the following manner.
Fig.1 shows evolution of EUR/USD spread during a day, for each of the seven years from 2003 through 2009. In the figure, the time axis is split into bins, each bin being 1hour long. The data from a given year are averaged within the specific bin, inferring the mean and RMS. 1.1 1.2 Central Europen time is chosen for the time axis for the following reason. Forex week begins, roughly speaking (since the volume increase is gradual) on Sunday 5pm and ends Friday 6pm Eastern time. It is convenient to define this week to consist of 5 full days, from 6pm Sunday to 6pm Friday New York time. When it's 6pm in New York, it's midnight in Berlin, Paris, Madrid, Rome, Geneva and Frankfurt. These cities use Central European Time or CET. Therefore, the convenience of using CET is that one gets 5 noninterrupted, full 24hour long trading days per week. Table 1 compares four time zones including major trading centers of the world. Some immediate conclusions from Fig.1 are:
In much the same approach as Fig.1, Fig.2 shows spread evolution during a fiveday forex week. Here a stable pattern is the abnomally high spreads in the first (and sometimes last) trading hours of the week. 

Last Updated ( Monday, 14 June 2010 16:10 ) 