Transaction Costs and Market Makers

Market makers are well compensated for allowing retail clients to enter the forex market. They take part or all of the spread in all currency pairs traded. In a common example, EURUSD, the spread is typically 3 pips (3/100 of a percent). Thus prices are quoted with both bid and offer prices (e.g., Buy EURUSD 1.2000, Sell EURUSD 1.2003). That difference of 3 pips is the spread and can amount to a significant amount of money. Because the typical standard lot is 100,000 units of the base currency, those 3 pips on EURUSD translate to $30 paid by the client to the market maker. However, a pip is not always $10. A pip is 1/100th of a percent, and the currency pairs are always purchased by buying 100,000 of the quote currency, which is also known as the counter currency. For the pair EURUSD, the base currency is USD; thus, 1/100th of a percent on a pair with USD as the base currency will always have a pip of $10. If, on the other hand, your currency has Swiss Frank (CHF) as a base instead of USD, then 1/100th of a percent is now worth around $8, because you are buying 100,000 worth of Swiss Franks.