WHO TRADES FOREX

FOREX MARKET STRUCTURE

As a comparison, let us first examine a market that you actually very familiar with: the stock market. This is how the structure of the stock market looks like:

“I have no choice but to go through a centralized exchange!”

 The stock market tends to be very monopolistic in nature. There is only one entity, one specialist that controls prices. All trades are confined to go through this specialist. Because of, the price may easily be altered to benefit of the specialist, and not to the traders.

How does this happen?
In the stock market, the specialist is confined to fulfill the order of its clients. Now, let’s say the number of sellers is more than the number of buyers. The specialist, which is forced to fulfill the order of its clients, the sellers in this case, is left with a bunch of stock that he cannot sell-off to the buyers.
For the purpose of preventing this to occur, the specialist will simply widen the spread or increase 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 requirements.

Trading Spot FX is Decentralized

You need not go through a centralized exchange like the New York Stock Exchange with just one price as you do so in trading stocks or futures,. In the Forex market, there is no single price that for a given currency at any time, which means quotes from different currency dealers vary from.

“So many choices! Awesome!”

This might be destroying at first, but this is what makes the Forex market so freakin’ awesome!

You cannot imagine it before. The market is huge and the competition between dealers is so fierce that you get the best deal almost every once. can you say, who does not get that?

The FX Ladder

Although the forex market is not centralized, it isn’t a pure and utter chaos! The participants in the FX market can be organized into a ladder. For the purpose of making in well understandable what we mean, here is a neat illustration:

In the top of the FOREX market ladder is the interbank market. Composed of the biggest banks of the globe and some smaller banks, the participants of this market trade are interlinked and interconnected to each other or electronically through the Electronic Brokering Services (EBS) or the Reuters Dealing 3000-Spot Matching.



The competition between the two companies – the EBS and the Reuters Dealing 3000-Spot Matching – is as like as Coke and Pepsi is. They are in constant battle for clients and continually try to one-up each other for market share. While both companies offer most currency pairs, some currency pairs are more liquid on one than the other.
In the EBS platform, EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and USD/CHF are more liquid. On the other hand, GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and NZD/USD are more liquid in the Reuters platform.
All the banks, interlinked with the interbank market can see the rates that each other is offering, but this doesn’t necessarily mean that anyone can make deals at those prices.
On the ladder are the hedge funds, corporations, retail market makers, and retail ECNs. Since these institutions do not have tight credit relationships with the participants of the interbank market, they have to do their transactions via commercial banks. This means that their rates are slightly higher and more expensive than those who are part of the interbank market.
At the very bottom of the ladder are the retail traders. It used to be very hard for us little people to engage in the FOREX market but, thanks to the advent of the internet, electronic trading, and retail brokers, the difficult barriers to entry in FOREX trading have all been taken down. This gave us the chance to play with those high up the ladder and poke them with a very long and cheap stick.
Now, we expect you that you know the FOREX market structure, let’s get to learn who are  the FOREX market players!