Price shading is an act of adding a pip or two to the currency quote if a forex broker believes the price of a particular currency will increase. Even though this is considered unscrupulous, traders need not to scramble to counter shading right away.

What exactly happens if price shading is happening in your account?

Brokers will receive a list of prices from the banks and arrange prices based on its aggregate prices. It will be the price they offer to clients once they have adjusted it for themselves. For example, the bank receives the price of 52-53 on 41 for EUR/USD. The bank will sell them at $1.4153 per euro or purchase it from them for $1.4152. Now, if the broker seeks to offer it to their retail client, they will add a margin on it and sell it for $1.4154 or obtain it for $1.4151. Many brokers offer a fixed spread such as this.

Certain brokers will look into the order flow and might stipulate there are many more clients who prefer buy side over sell side. Since the order flow comes from customers, the broker will manipulate the offer to charge more to all the buyers. They will conceal the spread to 1.4155 on the offer and 1.4152 on the bid. Therefore, the buyer pays a little more and the broker earns a profit. The broker then believes the market will plummet, and will alter the spread.

Why does price shading work? For instance, if a broker has 100 buyers and 100 sellers, he gains one pip on every trade, which is a total of 200 pips. But, if there are 150 buyers and 50 sellers, the broker raises the price to two pips for the buyers and no profit for the sellers. That tantamounts to a profit of 300 pips.

The only way to determine if a broker applies price shading is by looking at a terminal from Bloomberg or Reuters, or dealing with a broker that provides straight-through processing. Also, a trader could open account with two brokers, one with a dealing desk and the other with straight-through processing. Normally, dealers offering straight-through processing have no dealing desk but charge a commission. By doing so, traders can figure whether their broker is consistently higher on the buy side or lower on the sell side.

Yes, most brokers deceive their clients by price shading. But traders can cash in on this fraudulent act by doing his due diligence. Check every prospective broker to know their commission structures and their payment method. As much as possible, find a broker with a transparent, straightforward practice.