Killeens Financial 

Proinnsias Ó Cillín

Spread Trading v. Direct Trading

Spread Trading

The price at which you must buy or sell shares with an online spread-trading broker is set in the bid and offer price, respectively, you will find specified by the broker at the particular point in time.  The purchase price is based on the Offer price at this moment of time on the Stock Market, i.e., the best price at which an owner of the shares is now offering to sell the shares.  The sale price is based on the Bid price for the shares, i.e., the best price being bid now by potential purchasers of the shares.

If you go to buy a donkey at the fair, the owner will say:  "I'll sell you the donkey for $200."  That's the offer price.  You say: "I'll give you $100 dollars for him."  That's the bid price.  Now, the donkey is seldom sold at either the original bid price or offer price.  The seller, after humming and hawing a bit, may come down in his offer and ask for $180.  On the other hand, you may come up to $120."  At some stage, the bid  or the offer, though not answering the initial hopes of the other party, will reach a sufficient level for a deal to be struck.

With a spread-trading broker, you never deal at the actual sale price, but are obliged to buy or sell at the offer or  bid price.  You are not allowed into the market arena to place your own compromise bid or offer.  The level is set by the broker, either at the actual market bid and offer prices, or at an adjusted spread to give the broker a bit more profit on the transaction.  Since the bids and offers are always changing, the spread is variable.

Direct Trading

With Direct Trading, on the other hand, you can place your bid or offer live in the market at whatever price you wish.  It is as if you are actually present in the market place, sizing up what level you can force the price to, and making your play accordingly.  (This simple description is modified below under the heading "Corrections").

You raised your offer for the donkey to $150.  The owner is unyielding.  However, all the time he is keeping half an eye and half an ear on what is going on around him.  Now he hears another donkey-owner, nearby, caving in, and selling at $135.  He turns to you and he says:  "OK.  I'll sell at $150."  But you have also heard what's happening at the neighbour's pitch, and you respond:  "Sorry, you rejected my bid of $150 when I made it, and now it's off the table.  I'm now bidding $135."  The Internet allows you to keep an eye on what is happening on the Stock Market, and, if trends are changing, you can, at the touch of a button withdraw your order, and, if you wish, place a new order.

Corrections

The matter is not actually as simple as I have described it above.  The market in leading  shares is smoothed by Market Makers who buy and sell large quantities of the shares and release them to the market on the basis of a bid and offer price, which is availed of by trading brokers .  So, while your broker may appear to offer you the opportunity to trade directly, the available prices are to some extent fixed by these bid and offer prices set by the Market Makers.  

I use the terms Direct Trading and Spread-Trading to distinguish between services where the user is allowed the illusion of trading directly in the market place and services where his option is limited to accepting the given bid and offer prices.  The term Spread-Trading, however, is often used as synonymous with Spread-Betting, (described below), and an alternative use of Direct Trading would apply to substantial users who have an account with a Stock Exchange, rather than dealing through a broker.