Forex Market Organization

Let's first look at a market that most people are likely highly familiar with for comparison's sake: the stock market.

June 30, 2022 - 12:08 PM 495 views

Forex Market Organization

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Let's first look at a market that most people are likely highly familiar with for comparison's sake: the stock market.

The stock market's organizational structure looks like this:

The stock market is prone to being highly monopolistic by nature. Only one organization, one expert, controls prices.

This expert must approve all trades. This makes it simple to change prices so that specialists instead than traders gain.

What Causes this to Occur?

The stock market professional is compelled to carry out its customers' orders. Now imagine that the number of suppliers overtakes the number of consumers all of a sudden.

In this instance, the specialist, who is compelled to complete the order of his clients, the sellers, is left with a large amount of stock that he is unable to offload to the buyer side.

The specialist will merely increase the spread or the transaction cost to discourage sellers from entering the market in order to avoid this from happening.

In order to meet its objectives, the experts can therefore modify the quotes they are providing.

Decentralized Spot FX Trading

You don't have to use a centralized exchange like the New York Stock Exchange with a single price, unlike when trading stocks or futures.

Because there is never a set price for a particular currency on the forex market, prices from different currency dealers differ.

Although first intimidating, this is what makes the currency market so incredible!

You almost always receive the best deal because of the size of the market and the intense rivalry amongst vendors. And who doesn't want it, please?

Another amazing feature of forex trading is that it can be done from any location. It's comparable to exchanging rare purses or Jordans.

It is up to you to shop around for the finest deal if you want that Air Jordan 4 Retro Eminem Encore 2017 in pristine shape.

The Forex Market (FX) Ladder

The foreign exchange market is decentralised, but it's not completely chaotic!

The FX market's participants can be arranged in a ladder. Here's a clear example to help you see what we mean:

Forex Market Hierarchy

The interbank market is at the very top of the Forex Market(FX) market chain.

The participants in this market, which is made up of the biggest banks in the world, trade bilaterally or through voice or electronic brokers (such as EBS Market and Reuters Matching).

The rivalry between the two businesses, EBS and Reuters (now known as Refinitiv), is comparable to that between Coke and Pepsi.

They are always competing with one another for market share and fighting for customers. Although the majority of currency pairs are offered by both businesses, some currency pairs are more liquid on one than the other.

The main liquid currency pairs on the EBS platform include EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and USD/CHF.

GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and NZD/USD are more liquid currencies on the Reuters platform.

Although every bank that participates in the interbank market is able to view the rates that other banks are providing, this does not necessarily guarantee that any agreements can be closed at those rates.

The existing CREDIT connection between the trading parties will play a significant role in determining the rates, just like in real life.

It resembles going to your neighbourhood bank to get a loan. The better the interest rates and the bigger the loan you can acquire, the better your credit standing and reputation with them.

Hedge funds, businesses, retail market makers, and retail ECNs are listed after these on the ladder.

These institutions must conduct their transactions through commercial banks because they do not have close credit ties with those who participate in the interbank market.

As a result, their rates and costs are a little bit higher than those of the interbank market.

The retail dealers are at the very bottom of the ladder.

It used to be quite difficult for us common folk to participate in the forex market, but now that the internet, electronic trading, and retail brokers have all been developed, these formidable hurdles to entry have all been eliminated.

This offered us the opportunity to poke those who were up on the ladder with a very long, inexpensive stick.

Let's get to know the forex market (FX) players now that you are familiar with the forex market structure.

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