Think You Know The Forex Market Structure? Here Is How It Looks Like

Have you ever wondered about the structure of the forex market? For those folks that are familiar with the stock market, let’s use this open table below to examine what the forex market looks like

forex market structure

From the nature of the structure above, the stock market entails monopolistic tendencies where only one entity—one specialist is in the hem of price control.

All trades, no matter their volumes, must go through the dictate of this specialist. As a result, it is easy to alter and manipulate prices to suit the interest of the specialist, instead of the traders.

Now, how does this situation occurs? Let’s see.

The stock market is a process wherein the specialist has no choice but to fulfil the orders initiated by its clients. Now, assuming the numbers of sellers in the market suddenly outnumbered the buyers, the specialist (the seller in this case) who have to fulfil its clients’ orders, will be left with surplus stocks that he will not be able to sell off to the buyer side.

To prevent such unwelcomed situation from occurring, the specialist will increase the transaction cost or broaden the spread as a way of discouraging sellers from venturing into the market.

That is, the specialist can manipulate the quotes that it offers to suit its interest.

The Decentralized Trading Spot FX

While you will be required to go through a centralized exchange process like the New York Stock Exchange (NYSE) to trade stocks or futures, you don’t need to do the same with just one price in the FX.

The forex market is one in which there is no single or fixed price for a particular currency at any given time. What this mean that dealers in the market offers different quotes.

forex market structure

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At first, this might appear overwhelming, but precisely, that’s what makes the forex market such a unique one.   

The market is such a large one that is fiercely contested by the dealers in so much that you get the best deal possible every single time you trade. And who doesn’t want the best all the time?

Another thing that makes forex trading unique is the fact that you can do it from just about anywhere (even while on the go). The process is straightforward; it’s only up to you to find the best deal possible, and you’ll become set for life.

Understanding the FX Ladder

Although the forex market is decentralised, it is not free chaos.

The players in the market can easily be arranged into a ladder. Here is an illustration that gives a clear picture of what we mean.

Hierarchy of the FX market

The Interbank market sits at the top of the FX market. It comprises the largest banks plus some other smaller banks. Players in this market trade directly with one another or through electronic means by using the Reuters Dealing 3000-Spot Machine or the Electronic Brokering Services (EBS).

There is a high-level of competition between the two companies—Reuters Dealing 3000-Spot Machine and EBS—a competition that is similar to Pepsi and Coke.

They are continually engaging in battle to get clients and are actively trying to outdo each for market share. Although both companies offer excellent currency pairs, some of what they offer is more liquid on one compared to another.

On the EBS platform, USD/JPY, EUR/USD, EUR/CHF, EUR/JPY and USD/CHF are more liquid. On the other hand, the Reuters platform list of EUR/GBP, GBP/USD, NZD/USD, USD/CAD and AUD/USD, are more liquid.

The entire banks that make up the interbank market can see the rate every one of them is offering. However, it doesn’t go to show that everyone can initiate deals on those prices.

Just as it is in real life situation, the rates will largely depend on the established CREDIT dealings between the two parties involved. For instance, you have the ‘’Customer rate,’’ the B.F.F rate, and the “previous wife-you-took everything rate.”

It resembles when you put in for a loan at your local bank. You get a better interest rate and a larger loan as you credit standing and reputation looks better.

The next on the FX ladder are the hedge funds, companies/corporations, retail market makers as well as retail ECNs. These institutions do their transactions using commercial banks because they lack tight and secure credit relationships with players’ and participants of the interbank market. Against this backdrop, they have slightly higher and more expensive rates compared to those operating in the interbank market.

Right at the bottom of the FX ladder are none else but the retail traders. Before now, it is challenging for ‘small guys’ like us to partake in the FX market actively. However, with the coming of the internet, the use of electronic trading and the functions of retail brokers, all rebellious barriers to free entry into the forex market have been completely obliterated and forever vanquished. Every one of us now has the opportunity to rub shoulders (including brows and buttocks) with the Big Boys up the ladder. We can even poke them (like the Russian Bear) with a very long and cheaper stick.

Now that we have known the structure of the forex market, it’s time we take a look at the real-time players in the market. So ‘stay tuned’ for the next topic.    

  • BrokerEUR/USD
    Core Spreads 0.6pips (variable) margin: 3.33%
    SpreadEX 0.6pips (variable) margin: 3.33%
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