A currency’s smallest price fluctuation (tick) is called a “pip,” which is usually its fourth decimal point (0.0001).
Currency pairs for which Japanese yen is the counter currency is the exception to this rule. In these cases, a pip is the second decimal point (0.01). It shows some sample forex quotes and pip values.
Although some firms quote prices at the fifth decimal point, or one-tenth of a pip, the width of FX dealers’ bid-ask spreads, or the difference between the price they will buy from you and sell to you, is usually three to five pips in the major currency pairs (euro/U.S. dollar, British pound/U.S. dollar, U.S. dollar/ Japanese yen, U.S. dollar/Swiss franc, U.S./Canadian dollar, Aussie/ U.S. dollar, euro/Swiss franc and euro/Japanese yen).
For example, a typical spread for EUR/USD is three pips, or 1.2050-53. In this case, you can buy one euro from the dealer for 1.2053 U.S. dollars, but you’ll get only 1.2050 dollars if you immediately sell it back to them.
Mark Galant, CEO and chairman of Gain Capital Group, a firm that operates several FX portals including Forex.com and GainCapital.com, explains his traders try to buy at the bid from one customer and sell at the ask to another and earn the three-pip spread.
“[If] enough people [are] dealing on your platform, hopefully the buyers and sellers will even out to some extent,” he notes.
If not, Gain uses the interbank market’s tighter spreads to give them an edge. If a company trader buys EUR/USD at 1.2050 from a customer and no sell offers exists at 1.2053, he or she could unload the trade at 1.2052 through a bank and still make a two pip profit.
Proprietary traders at many retail firms not only make markets by offering to buy and sell from customers, but they also act as specialists who often take the other side of a trade to increase liquidity.
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