Currency exchange spreads are the difference between the price a dealer is willing to buy a currency (the bid) and the price they will sell it (the ask). Spreads exist in every market because liquidity providers must cover inventory risk, volatility, and operating costs. Understanding spreads helps you compare quotes intelligently and avoid unrealistic expectations.
Bid, Ask, and the Mid
A quote such as USD/IRR 590,000 / 595,000 means the dealer buys dollars at 590,000 rials and sells at 595,000 rials. The spread is 5,000 rials. The “mid” is the simple average (592,500) and is often used as a reference for analytics. In practice, you almost never trade at the mid; you buy at the ask and sell at the bid, incurring the spread as a transaction cost.
Who Sets Spreads and Why They Change
Spreads are set by market makers—banks, brokers, exchanges, or money changers—based on their view of risk and competition. When markets are calm and liquid, spreads tend to narrow. When uncertainty rises, liquidity providers widen spreads to account for faster price swings and the possibility that they will get “picked off” by informed traders.
- Volatility: More volatility means wider spreads to cover risk.
- Competition: Many competing dealers usually compress spreads.
- Inventory: If a dealer is “long” dollars, they may price more aggressively to sell—affecting one side of the spread.
- Costs: Overheads, compliance, and cash logistics feed into retail spreads.
Liquidity and Market Microstructure
In major pairs like EUR/USD, interbank spreads can be fractions of a pip during peak hours. In fragmented or illiquid markets—especially parallel markets—spreads are much wider. Fewer competing quotes, cash handling, settlement risk, and regulatory frictions all add basis points to the difference between bid and ask.
Microstructure also matters. Right before a major data release, liquidity providers often pull back, widening spreads and reducing size. Overnight or weekend periods behave similarly. After the event, spreads can normalize rapidly as liquidity returns.
Retail vs. Interbank Pricing
Retail money changers face costs and risks that an electronic interbank dealer may not: cash handling, counterfeit detection, physical security, and staffing. As a result, the retail spread you see on the street will typically be wider than the screen spread on institutional platforms. Be wary of quotes that look “too good to be true”—they often come with conditions on size, timing, or settlement method.
How Spreads Affect What You Actually Pay
Suppose you want to buy USD 1,000 at 590,000 / 595,000. You pay 595,000 rials per dollar, or 595,000,000 rials. If you immediately sold the dollars back at 590,000, you would receive 590,000,000 rials, realizing a 5,000,000 rial loss—the spread cost. The larger your trade and the wider the spread, the more the transaction cost matters.
Comparing Quotes the Right Way
- Compare complete quotes: Always look at both bid and ask, not just a mid or “headline” number.
- Normalize for size: Ask if the price applies to your intended amount; large tickets often require different terms.
- Confirm settlement: Cash vs. transfer, timing, and location can change the economics.
- Check freshness: In fast markets, a quote that’s minutes old may no longer be valid.
Why Spreads Widen in Parallel Markets
Parallel markets are fragmented: quotes come from small dealers, messaging groups, and bilateral networks. Information travels unevenly, and local inventory constraints can bite. Dealers protect themselves from stale information and potential fraud by quoting wider. Add in the operational reality of moving cash safely, and spreads naturally expand during stress.
Practical Tips
- Time your trades: Aim for active hours when more quotes are available.
- Use multiple sources: Look for convergence across several dealers or platforms.
- Expect wider spreads around events: Central bank decisions, CPI, payrolls, or political headlines.
- Beware of the mid: It’s useful analytically but rarely tradable.
Key Takeaway
Spreads are a rational price for immediacy and risk transfer. The more volatile and fragmented the market, the more you pay. Compare quotes carefully, confirm terms, and remember that a realistic spread is a healthy sign of functioning liquidity. For live pricing context, check the latest USD to Toman and EUR to Toman rates.