For years, the smallest movement in an asset’s price has been measured by one pip. Depending on the type of asset, this pip is placed in either the fourth or the second decimal place. For example, if we look at the EUR/USD currency pair, we see that it is currently trading at 1.2822.
Thus, the smallest possible change in the pair’s price would be an increase to 1.2823 or a decrease to 1.2821. The same applies to currency pairs that have only two decimal places. At the moment, USD/JPY is trading at 102.98, so it could rise to 102.99 or fall to 102.97. Since this type of pip movement has been around for years, most traders are accustomed to it.
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However, as electronic forex brokers gained traction, they began introducing new innovations and methods that altered the way certain assets are quoted and traded. One of the most significant innovations has been the introduction of the fractional pip. This involves adding an extra decimal place to the price quotes of certain assets. Thanks to fractional pips, traders can gain a better understanding of price movements and follow them more closely. With fractional pips, currency pairs that once used four decimal places now use five, while pairs that used two decimal places now have three.
Undoubtedly, the greatest benefit of fractional pips is the broker’s ability to offer tighter spreads to its clients – brokers using fractional pips can quote spreads of 1.5, 2.5, and so on. Saving half a pip may not seem significant, but traders who regularly close large trades and deal with substantial amounts of money will certainly appreciate this enhancement to the forex market.