Understanding FX Spreads: What the Bank Doesn’t Tell You

Look at any currency quote and you will see two numbers, not one. EUR/USD might read 1.0805 / 1.0807. The first is the price at which you can sell euros; the second is the price at which you can buy them. The tiny gap between them — here, two pips — looks like a rounding error. It is, in fact, one of the most quietly profitable numbers in finance, and understanding it is the difference between being a price-taker who never asks questions and a customer who knows exactly what they are paying for.

This is a tour of the FX spread: what it is, what it truly costs, why the spread quoted to you is not the spread quoted to the next customer, and — drawing on dealers’ own published terms of dealing — the things a bank is under no obligation to tell you.

What Is an FX Spread?

Most currency prices are two-sided. The lower number is the bid — the price at which the market maker will buy the base currency from you. The higher number is the offer (or ask) — the price at which it will sell the base currency to you. The distance between them is the spread.

That spread is measured in pips. A pip is the smallest standard increment of most currency prices — normally the fourth decimal place, so 0.0001. In EUR/USD, a move from 1.0805 to 1.0807 is two pips. The leading digits that rarely change moment to moment (the “1.08”) are called the big figure; dealers quoting quickly over the phone often say only the last two digits — “05, 07” — because everyone already knows the big figure.

Here is the key idea: the spread is not an accident of the market. It is the price of immediacy. A market maker stands ready to trade with you at any moment, taking the other side of your deal and warehousing the risk until it can offset the position. The spread is what it charges for that service — and, done at scale, it is how the entire market-making business is funded. In the wholesale interbank market, spreads for major currencies are tiny, often around a tenth of a percent. The further you sit from that wholesale core, the wider the spread you are shown — and the reason why is where this gets interesting.

The Spread Is a Markup, Not a Fee

The single most useful thing to understand about the spread is that it is a markup, not a separate charge. When a dealer shows you a price, that price is what its own published terms often call an all-in price: it already contains the dealer’s margin, layered on top of the rate at which the dealer itself can trade in the wholesale market.

This is why “zero commission” or “no commission” advertising deserves a hard look. A firm can truthfully say it charges no commission while still earning a healthy margin — because the cost has simply been moved into a wider spread. As one long-running FX market guide bluntly puts it, whether a commission is charged is not what matters; only the overall net rate matters. A headline of “no fees” with a poor rate can cost you far more than a modest, transparent commission on a good rate.

How much markup? In the wholesale market, the best-connected customers might see spreads of around two pips in EUR/USD against roughly one pip in the pure interbank market. Move down the chain toward less sophisticated customers, and the markup can widen to many times that — historically, to “big figure” territory for the least aware. The mechanics are simple: a bank’s pricing engine sources a wholesale rate, then adds a margin before showing it to you. You almost never see the wholesale price underneath.

Why Your Spread Isn’t the Same as Everyone Else’s

Spreads are not posted prices like a supermarket shelf. They are individually tailored, and dealers say so plainly. One major dealer’s published spot FX terms, for example, state that its all-in prices and spreads are “tailored to individual counterparties” and based on a broad range of factors including market conditions, the firm’s own costs, the services provided, and — tellingly — the firm’s “relationship with the counterparty.”

Several standard levers set the spread you personally see:

• Trade size and credit. Bigger, creditworthy, established customers command tighter spreads. A pricing engine may apply a minimum spread, a fixed margin added to each side, or a spread that is a multiple of the wholesale spread.
• How you trade. Dealers openly reserve the right to skew a spread — making it wider on the bid or the offer — depending on which way they expect you, “based on its trading history,” to deal. If they think you are a buyer, the offer can be shaved a little wider.
• How sophisticated you appear. Market-savvy customers are usually shown a two-way price (both bid and offer), which makes the spread visible. Less sophisticated customers are often shown a one-way price — you must say whether you are buying or selling first — which hides the margin entirely.

None of this is hidden malpractice; it is disclosed, standard market-making. But it means the “spread on EUR/USD” is not a single number. It is a number about you.

The Dollars Behind the Pips

Pips feel abstract until you convert them to money, and the conversion is unforgiving because it scales linearly with size. A two-pip markup sounds trivial. On a one-million-euro EUR/USD trade, those two pips are worth about $200. On two million, $400. On ten million, $2,000. The percentage never changes; the dollars just get bigger.

One subtlety worth getting right: a pip’s cash value lands in the quote currency — the second currency in the pair — not the one you are trading. A one-pip move on a euro amount priced in EUR/USD is a US dollar figure; the very same one-pip move in EUR/GBP is a sterling figure, and in EUR/JPY a yen figure. So when you compare the markup on two different pairs, you are not comparing like with like until you translate each pip back into a common currency. A two-pip spread might be worth about $200 on a million in a dollar-quoted pair, yet a two-pip spread on a franc- or Aussie-quoted pair is first a franc or Aussie-dollar amount that only becomes a different dollar figure once converted. The pip count can look identical across pairs while the real dollar cost quietly differs — which is exactly why a dealer’s markup sheet computes the profit in the quote currency first and converts to dollars second.

Now put that against what it actually costs a broker to provide the trade. Add up a typical per-million cost stack — liquidity providers, the trading platform, connectivity and post-trade plumbing, prime brokerage — and it lands in the low tens of dollars per million traded. A firm charging a two-pip spread is collecting roughly $200 per million against costs an order of magnitude smaller. That gap is not a scandal; it is the business model. But it explains why “commission-free” trading is not free, and why spread — not commission — is where the real economics of retail and wholesale FX live.

What the Bank Isn’t Obligated to Tell You

Here is where dealers’ own disclosures become genuinely illuminating — because they are written to protect the dealer, and in doing so they reveal exactly how the game works. Read the spot FX terms that major banks publish and a consistent picture emerges.

First, the dealer trades as principal, not as your agent. It is “an arm’s-length party,” not a fiduciary or advisor. That means its interests can, in its own words, “conflict with or diverge from” yours. When you ask for a price, you are negotiating with a counterparty, not consulting an advisor.

Second, the dealer is not required to break down the price. Published terms state plainly that a firm “is not obligated to disclose the components of its all-in price on any particular transaction.” The markup is inside the number, and it stays there.

Third, the dealer may trade around your order. Disclosures describe how a market maker may hedge or “risk-mitigate” exposure before or alongside your trade, that these activities “can have an impact on the prices” you are offered, and that they may even “trigger or prevent triggering of stop loss orders.” A firm may hold or work other customers’ orders — and its own — ahead of yours, and it is “not required to disclose” that it is doing so.

Fourth, your trading becomes the dealer’s information. Banks state that they analyze customer flow for pricing and risk management, and that anonymized, aggregated information about your flow “may form a constituent part of the market color the Firm provides to its counterparties.” Your activity, stripped of your name, becomes a data point sold as insight to others.

There is an important counterweight, though. The FX market operates under the FX Global Code — a set of global principles of good practice maintained by the Global Foreign Exchange Committee, organized around six areas including execution and information sharing. It is voluntary rather than law: dealers and other participants sign a public Statement of Commitment to it, not a contract with you. But its principles speak directly to everything above — it asks participants to handle mark-ups fairly and transparently, to treat pre-hedging and trading around orders in a way that is not designed to disadvantage the client, and to protect confidential customer information. So while a dealer is not obligated to itemize your price, a firm that has committed to the Code is expected to price and handle your order in line with those standards. Knowing the Code exists — and that reputable dealers publicly commit to it — is itself useful: you can ask whether a counterparty adheres to it.

Again — this is disclosed conduct, not a leak. The point is not that dealers are behaving badly. It is that the customer who has actually read these terms, and knows the standards the market holds itself to, understands the relationship for what it is, while the one who hasn’t assumes a level of care and transparency that was never automatically on offer.

Retail vs Wholesale: Why Size Cuts Both Ways

One counterintuitive twist ties the whole picture together: spreads behave in opposite ways for small and large trades, and for a good reason.

For small, retail-sized trades, the cost of handling a transaction — the people, the processing, sometimes physical cash — is roughly fixed regardless of the amount. Spread that fixed cost over a tiny trade and it looms large, so retail spreads start wide and narrow as size grows. For large, wholesale trades, the per-transaction cost is trivial relative to the amount, but market risk rises with size — a big position is harder to offload without moving the market — so wholesale spreads widen for large trades to protect the price maker. The dividing line between the two worlds is not fixed; an established wholesale customer can get wholesale spreads even on a small ticket, which is precisely why relationship and sophistication matter so much.

How to Read — and Reduce — the Spread You Pay

You cannot make a dealer show you its wholesale price, but understanding the spread changes how you engage with it. Ask for a two-way price where you can — seeing both the bid and the offer makes the spread visible and is itself a signal that you know what you are doing. Compare the net, all-in rate across providers rather than headline “no commission” claims: the only honest comparison is how many units of currency you actually end up with after every charge. And recognize that the same firm may quote different prices by platform, venue, or channel, because its own terms reserve the right to do exactly that.

None of this is a trading strategy, and none of it guarantees a better price. It is simply the difference between paying a spread you never examined and paying one you understand.

The Bottom Line

The FX spread is the most underestimated number in the market. It hides in plain sight as a two-pip gap, reads as “free” when there is no commission, and quietly funds an entire industry. Seen clearly, it is a markup — layered over a wholesale rate you rarely glimpse, measured in pips that convert to real dollars, tailored to who you are, and governed by terms that protect the dealer far more than they inform you. The bank is not hiding any of this; it is written down. The advantage goes to the customer who bothers to read it — and who, the next time two numbers appear on a screen, knows exactly what the gap between them means.

The Currency Stack provides educational and research content only. Nothing here is financial, investment, or trading advice, or a recommendation to buy or sell any asset or to use any provider. Markets carry risk; do your own research and consider professional advice before acting.

Further reading: This premium explainer is part of our FX instruments and market-structure series. For the wholesale machinery behind your spread, see The FX Market: Interbank, Prime Brokers, ECNs and ‘Last Look’ and the pillar guide What Is the FX Market and Why Does It Matter? To follow a single trade from quote to settlement, read How a Spot FX Trade Really Works, and for why the mid-price is always moving, What Moves Currency Prices? The FX Global Code referenced above is published by the Global Foreign Exchange Committee. Terms in bold are defined in our glossary. Sources: practitioner FX pricing and markup references; major dealers’ published spot-FX terms of dealing; and the FX Global Code (Global Foreign Exchange Committee).