How different is the forex market structure comparing to others?

There is more than one way to trading. They may involve assets such as investments, commodities, or currencies. Today, let us differentiate the two of the most used type of trading market structures: the stock market and the forex market structure.

The stock market structure

The centralized market goes in between both stock buyers and stock sellers. Some examples of central markets are the New York Stock exchange or the Nasdaq. It is a monopoly where one central exchange controls all the prices. Due to this reason, brokers or market makers tend to benefit more than the traders because they can easily manipulate the prices.

Manipulate the prices? How? A broker’s role in the stock market is to fulfill a trader’s order even when they do not want to or can’t do it anymore, but they have no choice. There are times when the sellers are more than the buyers leaving the broker with many stocks that he can’t sell in place of the seller. Brokers found a way to avoid this scenario by widening spreads to have fewer sellers in the market. When we say widening the spread, we mean putting a higher transaction cost. We can now see the bigger picture of how brokers can manipulate the offer prices to accommodate their responsibilities and needs.

The forex market structure

You will realize why forex trading has become widespread, renowned, and preferred by some traders in this topic.

The forex trading market structure is decentralized, and a trader does not need to go through a central exchange to trade, unlike the stock market. The price is not single, and quotes are not the same for all currency dealers. The market can be very massive. The dealers are also many; that is why a trader can choose from a lot of offers. You can always get the best price available in the market with this kind of market.

The hierarchy of the forex market

Indeed, the forex market does not have a central exchange, but things are organized using a structure.

If we look at the hierarchy framework, it is something like this:

  • Major banks
  • Electronic brokering services/ Reuters dealing 3000 — spot machine
  • Medium and small banks
  • Retail brokers, retail ECNs, hedge funds, and commercial companies
  • Retail traders

The brokers

In this enumeration, the interbank market composed of the world’s biggest banks sits on top. They trade directly by voice or electronic brokers like EBS market and Reuters matching, also known as Refinitiv. These two brokers are the most formidable competitors in terms of forex trading brokerage. The goal of both companies is market shares.

Their roles are essentially the same, but currency pairs from both companies can be very different. The currency pairs EUR/USD, EUR/JPY, USD/JPY, EUR/CHF, and USD/CHF tend to be more liquid in the EBS platform. If you are trading GBP/USD, USD/CAD, R/GBP, and NZD/USD, they tend to be more liquid in the Reuters/ Rifinitiv platform.

Next in the hierarchy

All participating banks in the interbank market have access to the offer rates, but not everyone can make deals with those prices.

Next are the institutions like hedge funds, corporations, retail brokers, and retail ECNs. Their credit relationships with the participating banks are not too close, so they still need to transact with commercial banks even if their rates are higher than the participating banks of the interbank market.

After all the process, we finally arrive with the retail traders. It may sound too long, but the internet and technology made everything easy and possible.