babypips
Preschool Who Trades Forex?
Forex Market Structure
For the sake of comparison, let us first examine a market
Partner Center
that most folks are probably very familiar with: the stock Find a Broker
market.
This is how the structure of the stock market looks like:
Best MT4 Broker
TRADE NOW
with lowest cost
By its very nature, the stock market tends to be very monopolistic. There is
only one entity, one specialist that controls prices.
Advertisement
All trades must go through this specialist. Because of this, prices can easily
be altered to benefit the specialist and not traders.
How does this happen?
In the stock market, the specialist is forced to fulfill the order of its clients.
Now, let’s say the number of sellers suddenly exceeds the number of
buyers.
Advertisement
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 buyer
side.
In order to prevent this from happening, 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 their needs.
Trading Spot FX is Decentralized
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.
In the forex market, there is no single price for a given currency at any time,
which means quotes from different currency dealers vary.
“So many choices! Awesome!”
This might be overwhelming at first, but this is what makes the forex market
so freakin’ awesome!
Advertisement
The market is so huge and the competition between dealers is so fierce
that you get the best deal almost every single time.
And tell me, who does not want that?
Also, one cool thing about forex trading is that you can do it anywhere. It’s
just like trading Jordans or rare handbags.
You want that mint condition Air Jordan 4 Retro Eminem Encore 2017, so
it is up to you to find the best deal out there.
The FX Ladder
Even though the forex market is decentralized, it isn’t pure and utter chaos!
The participants in the FX market can be organized into a ladder. To better
understand what we mean, here is a neat illustration:
At the very top of the forex market ladder is the interbank market.
Composed of the largest banks in the world, the participants of this market
trade directly with each other (“bilaterally”) or through voice or electronic
brokers (such as EBS Market and Reuters Matching).
The competition between the two companies, EBS and Reuters (now
rebranded as Refinitiv), is similar to Coke and Pepsi.
They are in a constant battle for clients and continually try to oneup each
other for market share. While both companies offer most currency pairs,
some currency pairs are more liquid on one than the other.
Advertisement
For the EBS platform, EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and
USD/CHF are more liquid.
Meanwhile, for the Reuters platform, GBP/USD, EUR/GBP, USD/CAD,
AUD/USD, and NZD/USD are more liquid.
All the banks that are part of 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.
Like in real life, the rates will be largely dependent on the established
CREDIT relationship between the trading parties.
It’s like asking for a loan at your local bank. The better your credit standing
and reputation with them, the better the interest rates and the larger loan
you can get.
Next 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 nonprofessional traders known as
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 that you know the forex market structure, let’s get to know them forex
market playaz!
Upgrade to Babypips Premium! Unlock exclusive content that will help prepare you for the
upcoming trading week. Subscribe today and save 20% with an annual subscription!
Next Lesson
Forex Market Players
Success is getting what you want; happiness is wanting what you get.Ingrid Bergman
Learn Forex
How to Trade Forex
Forex Quizzes
Forex Forums
Forex Glossary
Forex Margin 101
Technical Analysis 101
Risk Management 101
Forex Tools
MarketMilk™
Economic Calendar
RiskOn / RiskOff Meter
Position Size Calculator
"Back to Breakeven" Calculator
Pip Value Calculator
Pivot Point Calculator
Company
About
Contact
Advertise
Newsletter
Testimonials
FAQ
Subscribe
Babypips
Facebook
Instagram
Twitter
Babypips helps new traders learn about the forex and crypto markets without falling asleep.
We introduce people to the world of trading currencies, both fiat and crypto, through our nondrowsy educational content and tools.
We're also a community of traders that support each other on our daily trading journey.
Copyright © 2024 BabyPips.com LLC. All rights reserved.
Privacy Policy
Risk Disclosure
Terms of Use
Privacy Manager
