Definition of pips

Pips refer to the minimum change of an unit price and is one of the basic parameters in contract trading rules.

While the financial market quotes in dollar, it tends to sets pips in cent. Unlike traditional financial market, the cryptocurrency introduces lengthy decimal points in quotes for the purpose of appreciation and is designed mainly for transactions without specific price preference.

Pros and cons of pips size

Suppose that the exchange prioritize price over time while matching deals.

Financial research shows that the influence of pips size differs depending on the participant’s trading style.

Based on the supply and demand for liquidity, market participants can be divided into liquidity providers and takers. Pips are a key tool for trading platforms to regulate the relationship between liquidity providers and takers.

In an otherwise similar liquidity market, market makers (liquidity providers) compete on time when pips size are higher, and they tend to queue up at a specific price until it is triggered by price volatility. On the demand side, speculators (liquidity takers) pay at least half the pips liquidity in compensation to reach a deal.

When pips size are lower, some market makers can precede other market makers by competing on price at the expense of small pips. Competition will contribute to the narrowing of market bid-ask spreads, liquidity being spread across different prices levels. At this point, speculators benefit from market makers’ competition, thus paying less liquidity premiums.

It must be made clear that market makers’ intense competition doesn’t necessarily lead to more liquidity. To maintain their business, market makers need a certain amount of profit. Excessive competition (when speculative players with strong trading ability join) will damage market makers’ income, thus restraining market-making operation.

Generally speaking, when the liquidity is similar, market makers have an advantage in dealing with products with higher pips and speculators in dealing with products with lower pips.