Transaction Costs and Market Makers

Market makers are compensated for allowing clients to enter the market. They take part or all of the spread in all currency pairs traded. In a common example, EUR/USD, the spread is typically 3 pips (percentage in point) or 3/100 of a cent in this example. Thus prices are quoted with both bid and offer prices (e.g., Buy EUR/USD 1.4900, Sell EUR/USD 1.4903).

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 EUR/USD 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 cent (or whatever), and the currency pairs are always purchased by buying 100,000 of the base currency.

For the pair EUR/USD, the quote currency is USD; thus, 1/100th of a cent on a pair with USD as the quote currency will always have a pip of $10. If, on the other hand, your currency pair has Swiss francs (CHF) as a quote instead of USD, then 1/100th of a cent is now worth around $9, because you are buying 100,000 of whatever in Swiss francs