» Fractional Pip Pricing (2)

This is the answer of FXCM about my question on fractional pip pricing :

Hi, this is Tim Shea, the producer of the video about Fractional Pip pricing. I’d like to elaborate more on the benefits of fractional pips, and why I think that it is a great development in the FX market. As I mentioned in my video, since the introduction of fractional pips, we’ve seen generally lower spreads. The spreads I used in my video are real spreads coming from real prices.

Fractional pips introduces more precise pricing. This puts more pressure on the banks that provide us liquidity to offer us better prices. The multiple banks on our NDD system (currently 6, and we are working to add more) each have different prices. The system fills orders with the bank that offers the best prices for the necessary liquidity. So, that means if a bank wants order flow from our NDD system, it must give us higher bid prices and/or lower ask prices than the other banks are at the time. With an average nominal trading volume of over $200 billion per month, there’s a lot of order flow that’s worth competing for.

With fractional pips, the pricing becomes keener. There are many instances where several banks want to pick up some of our order flow. Without fractional pips, we had instances where 3 banks would quote a 3 pip spread, and that’s the lowest they are willing to go. They would want to cut their prices to pick up more business, but when a spread is 3 pips, going to 2 pips is cutting your price by 33%. That’s a lot! Many banks would be unwilling to do that. Now, with fractional pips, these banks can lower their spread by 5%, 10%, 20%, etc, in order to compete. So, in order to win the order flow, one bank might quote 2.8, while another quotes 2.5, and the third 2.9. Much of the time, the bank quoting 2.5 will get most or all of the orders, beating out the other 2 banks to get the business coming from the NDD system, while the bank with the highest price, 2.9, would get little or nothing of the order flow. This makes for more pressure on the banks to give better prices to the NDD system.

The result is generally lower spreads for FXCM clients. This means their cost of trading is now lower, saving them money. We’ve gotten a positive response to fractional pips from our clients, as they enjoy saving money.

Thank you for your answer.

This entry was posted on Monday, September 24th, 2007 at 17:12 and is filed under FXCM, Trading, trading platform. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.