If the term “price shading” sounds like something underhanded to you—you’re absolutely right! Price shading refers to a variable pricing, in which a broker arbitrarily changes the price within a certain range. It is not usually a large range, but even a little bit can be enough to increase his profit margins. Brokers often use this practice when their assessment of a currency indicates an upward trend, in order to profit more from each trade. This type of covert manipulation is possible because currency trading is not regulated or guaranteed, and therefore only requires agreement and cooperation between buyers and sellers.
Here’s what price shading means for money traders. The broker adds a pip or two to the price charged. A pip (percentage in point) is the smallest possible price change – usually about 1/100 of a percent or $0.0001. While this does not sound like a significant amount, when the trade involves large amounts of money, it adds up quickly and results in a tidy profit for the broker.
In the past, there was no easy way to know if a broker was using this practice and taking unfair advantage of traders. Brokers were able to change prices to their favor at will, with few traders aware it was being done, and no easy way to find out. The only way was to have one’s own terminal from Reuters or Bloomberg, or to deal with a broker that provided “straight-through processing.” Fortunately, now at last there is a much easier way!
Thanks to today’s technological advances, traders of any size or level can now have access to the data necessary to be able to accurately monitor and negotiate intelligently with these brokers. Specially designed software has been created to aggregate broker data on a global basis. With this accumulated and sorted data, traders can easily assess the market value and actually see what is happening with the prices in real time. More advanced software—like Broker Watch™ from eTech Money—has built-in flags to let traders know if and when the broker is using price shading; a trader can catch a price shading broker in the act!
By knowing whether your broker is shading, you can know how to best play your own hand. If the broker is shading to the buyer, and you sell, it is possible you could come out quite a bit ahead. The reason for this is that the broker tends to shade to his own advantage, which is to the disadvantage of the trader, whenever possible. Therefore, if you are going against that, you are probably doing the right thing, and that means profit in your pocket.
If you want to come out ahead in the currency trading game, the most important thing you need to do is research. Learn what you need to know—and take advantage of the available technology.
