To begin, let us look at a market that most people are undoubtedly extremely familiar with: the stock market.
The structure of the stock market looks like this:
The stock market is a monopolistic environment by definition. Prices are controlled by only one organization, one specialist.
This specialist must oversee all trades. As a result, pricing can be readily changed to benefit specialists rather than traders.
What causes this?
In the stock market, the specialist is obligated to fulfill its clients’ orders. Now suppose the number of suppliers suddenly outnumbers the number of purchasers. In this circumstance, the expert is forced to complete the order of its clients, the sellers, and is left with a large amount of stock that he cannot offer to the buyer side.
To avoid this, the specialist will simply widen the spread or raise the transaction cost to discourage sellers from entering the market.
In other words, the professionals can alter the quotes it provides to meet their requirements.
Decentralized Spot FX Trading
Unlike trading stocks or futures, you do not need to go through a centralized exchange with a single price, such as the New York Stock Exchange.
Because there is no single price for a specific currency in the forex market at any given time, prices from different currency dealers vary.
This may seem intimidating at first, but it is exactly what makes the FX market so amazing! Because the market is so large and dealer competition is so severe, you nearly always receive the best value.
And who among us does not want that?
Another appealing aspect of forex trading is that it may be done from any location. It’s the same as trading Jordans or high-end handbags, so it is up to you to get the finest offer available.
The FX Ladder
Even if the forex market is decentralized, it is not completely chaotic!
The FX market participants can be grouped into a ladder. Here’s an example to help you understand what we mean:
The interbank market is at the very top of the FX market chain.
Participants in this market, which is made up of the world’s major banks, trade directly with each other (“bilaterally”) or through voice or electronic brokers (such as EBS Market and Reuters Matching).
The rivalry between EBS and Reuters (now rebranded as Refinitiv) is akin to that between Coke and Pepsi.
They are constantly competing for clients and trying to outdo one other in terms of market share. While both businesses offer the majority of currency pairs, some are more liquid on one than the other.
EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and USD/CHF are more liquid on the EBS platform.
Meanwhile, GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and NZD/USD are more liquid on the Reuters platform.
All banks in the interbank market can see the rates that each other is giving, but that doesn’t guarantee that anyone can make deals at those prices.
Like in real life, the rates will be heavily influenced by the trading parties’ established CREDIT connection. It’s the same as going to your local bank and asking for a loan. The better your credit and reputation with them, the lower your interest rates and the greater the loan you can acquire.
Following that are hedge funds, companies, retail market makers, and retail ECNs. Because these institutions do not have strong credit ties with interbank market participants, they must conduct their transactions through commercial banks.