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Market structure

Most traders are not too concerned about understanding the structure of forex. This is a critical element that must be considered when developing and implementing a trading plan. The forex market is different from other global markets by its structure. The main factors affecting the structure of the forex market are the mechanism for trading forex products: the participants and their motivation, regulation and significant size of the market. Since transactions in the forex market are made over-the-counter, and not through the central exchange, like futures or stocks, prices behave differently. Understanding these differences is important for your development as a forex trader and will benefit you in the future.



OTC trading


The first thing to understand about the structure of the forex market is a way to trade products. Forex, for the most part, is an over-the-counter (OTC) market. This means that there is no central exchange through which tools are traded. When we say about instruments, we mean various forex products used by participants for making transactions - for commercial, speculative or hedging purposes. These products include: spot forex, simple forward transactions, forex trading Forex Options When a product is traded over-the-counter, this is done through a market maker. "", so as to eliminate the risk, in accordance with other requests, in the internal book of orders of the market maker, that is, the market maker takes the opposite side of the order, and opens a position against the client.

Popular trading instruments are products traded on exchanges, in particular, stocks and futures. Those. any transactions with these instruments are made through exchanges such as the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE). We further describe a number of characteristics of the over-the-counter and exchange market.




OTC Market:


  • Participation of market makers;
  • Trading company is a counterparty;
  • Strong price competition;
  • There is no uniformity in prices and quality of performance.


Exchange trade:

  • The exchange is the counterparty for all transactions;
  • Less price competition;
  • Standardized price and performance;
  • Regulatory control by the exchange.


Let us tell in more detail about what OTC trading means in relation to the forex market. Since there is no central exchange through which orders and transactions are processed, a sophisticated structure was formed, allowing participants to communicate and enter into transactions with each other. This network has different levels, each of which has its own institutions that perform different functions in the forex market. The interbank market is, in fact, the average between the larger banks. This network operates through EBS systems (electronic brokerage services) and the Reuters matching system. These two systems effectively aggregate the order books of other banks, showing the different rates, offers and quantities for which participants want to conduct transactions. This allows for proper market interaction, through the provision of sufficient liquidity, and efficient processing. The interbank market is available only to large banks with the highest level of credit standards, which eliminates counterparty markets and reduces competition. By restricting access to the interbank market, large banks maintain their share in forex turnover and, consequently, their profits.





At the top of the food chain are currency dealers. These are banks that carry out commercial currency transactions for their clients or for themselves. Such banks include Deutsche Bank, UBS, Citigroup, Barclays Capital, RBS, Goldman Sachs, HSBC, Bank of America, JP Morgan, Credit Suisse and Morgan Stanley. These banks control about 2/3 of the daily turnover of the forex market, as well as other forms of the interbank market. These banks interact with each other, on behalf of clients or on their own behalf, providing significant liquidity to the market, thus, it is possible to carry out large transactions, both corporate and speculative, and implement proper market functions. Dealer banks that form the interbank market, in fact, act as market makers, for the forex market, they set prices and manage the volumes used by the rest of the market.


At the next level of the forex market are financial and non-financial participants. This includes smaller banks, enterprises, hedge / mutual / pension funds, consultants for trading in futures markets. Traditionally, most of the exchange turnover is due to international trade flows. This trend has changed in recent years, and the lion’s share of turnover is in capital flows, speculative and hedging activities. This shift reflects the increasing recognition of currency trading as a means of generating income for all market participants, as well as the need to manage currency risks through hedging activities. At the next level are forex brokers and retail chains ECN (Electronic communications network). Traditionally, forex brokers have been a link between buyers and sellers, i.e. they mediate transactions between the end user and the liquidity provider (market bank). For the most part, this situation persists today. However, some brokers keep a book of orders and trade against their clients. Brokers and ECN, as a rule, have contracts with one or more liquidity providers, on the basis of which they can hedge positions in their order books and manage possible risks. As liquidity providers, the aforementioned banks or even retail brokers can act, depending on their needs. In the background of the whole picture are the central banks. Central banks monitor the movement of their own currencies, ensuring their stability and smoothness. They come to the market to diversify their foreign exchange reserves, influence the rates of their own currencies (not so often found today), and make international payments on behalf of the government. To this end, the central bank has its own dealers, which provide these flows of funds through large banks. In the past, central bank interventions were much more popular and had more influence than today. Today, instead of actively participating in market sales and purchases of their own currency, central banks use verbal interventions to influence the value.