What role does good or bad credit play in bid-offer forex spreads? Don’t we just assume these are all cash/up-front transactions? I ask because this comes up in one of the practice questions.
This is what the answer says: “A client with a poor credit profile may be quoted a wider bid–offer spread than one with good credit.”
The forex market is an OTC market. If you are a big player and presents no credit risk the dealer which is your counterpart (buys when you sell and sells when you buy) will be more prone to have a tighter bid ask spread. This is equivalent to charging a client less because the saler knows that he will come back maybe with a larger order next time.
If you trade stocks trough a broker dealer you will notice that the larger your order or the more you trade the less you pay. If I have a poor credit rating I will not be able to come back in order to make up for the discount you provided me the last time we made business together.
Hope it helps.
G’day Flo. That makes intuitive sense. Thank you.
Keep in mind, though, that the curriculum says larger orders garner wider spreads, since larger supplies can be more difficult for the broker to acquire.
The bit about a poor credit rating leading to a lower likelihood of repeat work is an angle I have not heard before, but it makes sense.
True. The bigger you are the more market impact you have. I was meaning a big client according to the business you bring. But the word “big” was not appropriate. You are right.