Currency execution costs hide in spreads and margin

A pair is two names and one fill

Every currency transaction is a simultaneous purchase of one currency and sale of another. The pair is quoted with a first name, the base currency, and a second name, the quote currency, which is the unit in which one unit of the base is priced.

The archive describes an over-the-counter market: an interbank network with no single physical exchange, linked across global centers. Because dealing is direct among those centers, a session can stay open whenever another center is working. Hours are given as Sunday 5pm ET to Friday 4pm ET through the working week.

Daily average currency-market turnover is given as about $1.9 trillion, compared with about $50 billion for worldwide equities.

The commission sits in the quote

Currency trades are presented as carrying no separate commission because the cost of the trade is built into the bid-ask spread. After that separate ticket fee is removed, the remaining bid-ask gap is the spread cost, the priced cost of getting a currency pair filled.

A euro-dollar quote of 1.3209 bid and 1.3212 ask is identified as a three-pip spread and as the cost of that trade. A pip is the quoted price increment of a pair. Its cash value changes with the pair and with contract size.

Lot size turns a pip into cash

Pip value is said to vary by pair and lot size. The archive illustrates a mini-contract at $1 versus $10 on a standard contract for the same pair. Lot size is the contract unit that scales how much each pip is worth and therefore how large a small quote change becomes.

The margin deposit is a performance bond

Opening a currency account is described as buying on margin, which means the position is taken with leverage. Margin is characterized as a good-faith deposit or performance bond against trading losses, not a down payment, and brokers are said to handle it differently.

The margin deposit is that posted bond, not a down payment on the notional size of the pair. Leverage is the exposure created when a pair is bought or sold against that posted bond rather than against the full notional.

Rollover is a financing charge on an open pair

Positions still open around 5pm ET can be charged a rollover interest rate because each trade borrows one currency to buy the other. Rollover is the daily interest charge or credit that appears because one currency is borrowed to hold the other past the financing cutoff.