The foreign exchange market—commonly called the forex or FX market—is a massive global system where currencies are bought and sold. It is decentralized, meaning there is no single physical location or central exchange controlling everything.
With daily trading volumes now exceeding $7 trillion, the forex market is the largest financial market in the world. It plays a huge role in keeping the global economy running by enabling international trade, cross-border payments, and foreign investments.
In this lesson, we will break down how the forex market is structured, who participates in it, and how retail forex trading became accessible to everyday people. To understand the uniqueness of forex, it helps to compare it to a market many people already know well—the stock market.
Stock Market Structure: A Centralized System
The stock market is a classic example of a centralized financial market. In this setup, one main entity—often called a specialist or market maker—controls and oversees price movements. All buy and sell orders must pass through this single specialist.
Because of this centralized nature, the specialist has significant influence over prices. For example:
- If the number of sellers suddenly becomes much higher than the number of buyers, the specialist must still fill orders.
- To protect themselves from losing money, they may widen the spread (the difference between the buy and sell price) or increase transaction costs.
- By adjusting the spreads or quotes, the specialist can discourage certain trades and essentially “manage” market imbalances.
This means prices can be altered to suit the specialist’s own interests rather than those of the traders.
Forex Market Structure: A Decentralized System
Trading in the forex market is very different. Unlike stocks or futures, you are not required to use a single exchange like the NYSE. There is no single price for a currency pair at any given moment. Instead, prices vary because different banks, dealers, and brokers provide their own quotes.
This decentralization may sound chaotic at first, but it is actually one of the biggest strengths of the forex market. The market is extremely large, and the competition among dealers is intense. As a result:
- Traders usually get highly competitive prices.
- No single entity controls the market.
- Trading can be done from anywhere in the world with an internet connection.
Think of it like buying rare sneakers or limited-edition handbags. If you want a specific collector’s item, you shop around different sellers to find the best deal. Forex works in a similar way—multiple dealers compete to offer the most attractive price.
The FX Ladder: How the Market Is Organized
Even though forex is decentralized, it still follows a hierarchical structure known as the FX Ladder. This ladder represents the different levels of participants in the market, from the most powerful at the top to the smallest at the bottom.
Understanding this hierarchy helps you see how orders flow and why different traders get different pricing.
1. The Interbank Market (Top of the Ladder)
At the highest level of the forex market is the interbank market, where the largest global banks trade currencies directly with one another. These trades often involve millions or even billions of dollars.
Banks in the interbank system trade either:
- Bilaterally (directly with each other), or
- Through major electronic brokers like EBS Market and Reuters Matching (now part of Refinitiv).
These two platforms are like the “Coke vs Pepsi” of the forex world. Both operate highly competitive central limit order books (CLOBs) where huge volumes of trades are matched.
Each platform is more liquid for certain currency pairs:
- EBS is more liquid in: EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, USD/CHF
- Reuters/Refinitiv is more liquid in: GBP/USD, EUR/GBP, USD/CAD, AUD/USD, NZD/USD
All banks in the interbank market can see the prices offered by other banks, but that doesn’t mean everyone can trade at those prices. Rates depend heavily on credit relationships between institutions. Just like you get better loan terms at your local bank if you have a good credit history, banks get better pricing in forex if they have strong, trusted relationships with one another.
2. Hedge Funds, Corporations, Retail Market Makers & ECNs
Below the interbank market are large financial institutions such as hedge funds, multinational corporations, and retail electronic communication networks (ECNs). These players:
- Don’t have strong enough credit relationships to deal directly in the interbank market
- Must trade through large commercial banks
- Typically receive slightly worse pricing compared to interbank participants
Even though they deal in huge amounts, they still pay a premium compared to top-tier banks.
3. Retail Traders (Bottom of the Ladder)
At the base of the ladder are retail traders—ordinary individuals trading through online forex brokers. For many years, participating in forex was extremely difficult for small traders due to high capital requirements and limited access.
However, the rise of the internet, electronic trading systems, and retail forex brokers changed everything. Now, anyone with a laptop or phone can participate.
Retail traders often use high leverage, allowing them to control large positions with relatively small capital. This access gives small traders the opportunity to interact with the same market as the big institutions—but from far down the ladder.
In a humorous way, retail traders can now “poke” the big players using a long, inexpensive stick. We can participate, but we are still the smallest group in the hierarchy.
Final Thoughts
The forex market may be decentralized, but it has a clear structure that determines how prices flow and who gets access to the best rates. From massive global banks at the top to individual traders at the bottom, each level plays a critical role in keeping the market running smoothly.
Understanding this structure is essential for developing strong trading knowledge. It helps you see:
- Why prices differ between brokers
- Why spreads change
- Why institutions trade differently from retail traders
As we move forward, we will dive deeper into each category of participants and explore how the modern retail forex market was born.
Join Gen z Official WhatsApp Channel to share your thoughts and stay updated on time
https://whatsapp.com/channel/0029VaWT5gSGufImU8R0DO30
