What Is the Structure of the Forex Market?

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efore we continue with our Forex knowledge, we will stop by at the stock market.

It is always easier to imagine how something is structured if we compare it. 

Do you remember how you were living in the old ages? Nope! Because we live in the 21st century!!!

Without the invention of electricity, we wouldn’t have had the Internet. Without the Internet, we couldn’t have traded freely. So, Thank you, Benjamin Franklin!

Centralized Financial Market

A centralized market is a financial market structure that consists of having all orders routed to one central exchange with no other competing market.

It is very monopolistic because there is one specialist that controls the prices.

All trades must go through this specialist. This leads to the unpleasant fact that prices can be changed according to the specialist’s needs at the current moment and this sometimes won’t be for the benefit of the traders.

Why does this happen?

In the stock market, the specialist always has to execute the order of its clients whether they want to buy or sell. What happens if the number of sellers suddenly exceeds the number of buyers.

The specialist, which is forced to fulfil the order of its clients, the sellers, in this case, is left with a bunch of stock that he cannot sell-off to the buyer side.

At this moment, he will be driven to the corner. He has to prevent this from happening, otherwise, the stock market will be losing money. It will get unstable. 

Usually, they do it by widening the spread or increasing the transaction cost to prevent sellers from entering the market.

In other words, the specialists can manipulate the quotes it is offering to accommodate its needs.

Heading towards our FX market

Forex is the largest financial market in the world. The unique part is that there is NO central marketplace. 

Unlike in trading stocks or futures, you don’t need to go through a centralized exchange like the New York Stock Exchange with just one price.

Every transaction is made electronically via computer networks between traders around the world. 

The market is open 24 hours a day and exchange rates can change any second so the market is constantly in flux.

Meaning that there is no single price that for a given currency at any time, which means quotes from different currency dealers vary.

Let’s take a look at the forex market structure and its hierarchy.

At the top of the forex market is the so-called “Interbank market” where the largest banks and financial institutions trade currencies between themselves. 

Around 50% of all forex transactions are interbank trades where the participants can exchange currencies directly or through a broker. The two largest brokers on the interbank market are Rifinitiv and CME. Before rebranding, known as Reuters and EBS, respectively. 

These two brokers are as great rivals as Nike and Adidas are. They are the biggest ones on the market and fight to win over the clients all the time. 

While both companies offer most currency pairs, some currency pairs are more liquid on one than the other.

For instance, the liquid ones on the EBS platform are EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and USD/CHF. 

There is a small difference on the Reuters platform. The more liquid are GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and NZD/USD. 

Every participant on the interbank market has an established credit score, therefore the higher the score is the better rates and larger loan they can get. Same as when you go to your local bank.

On the lower step are the corporations, retail market makers, retail ECNs and of course hedge funds. 

These participants cannot make deals on the interbank market, so they make their transactions via commercial banks. Of course, using intermediaries means that there will be some additional fees and slightly higher rates.

You can see that at the bottom sit the retail traders. 

However, with the evolution of the market and all the new retail brokers and new platforms, it is easier than ever for ordinary people to enter the forex market and compete with the high rollers.

Let’s jump to the next lesson and see who those high rollers are. 

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