Home Library Structure of the Forex market


Structure of the Forex market

Structure of the Forex market

Unlike the stock market which usually has its own main exchange center, the Forex market has no physical center. Instead, it has exchange centers all over the world in New York, Hong Kong, Sydney, Frankfurt, Tokyo, and many others. Thus, structure of the Forex market is characterized by the diversity of its participants.

General characteristics of the market participants

The Forex market participants are central banks, major and minor commercial banks, investment funds, the Forex brokers, and traders. Central banks are on the top of the Forex market’s hierarchy. The majority of them in the structure of the currency market because they interact directly with electronic communications networks and Reuters Dealing 3000. They are followed by medium and small commercial banks, which carry out trading activities in Forex and the interbank market. Traders are the most numerous participants in the Forex market conducting operations on acceptable conditions for with the least risk.

Types of participants

Thus, all participants can be divided into financial and non-financial in the structure of Forex. They may be businesses, banks, hedge/mutual/pension funds, large investors, and small traders. In Forex, most of the currency turnover is usually the result of international trade flows, but this trend changes recently due to increase of capital flows and the number of speculative and hedging transactions. These changes reflect the growing acceptance of Forex as a mean to generate revenue for the market participants and regulation of the foreign exchange risks with the help of hedging activities.

Role of banks in Forex

Role of banks in Forex is hard to overestimate. Forex is operated by large international banks such as Bank of America, Deutsche Bank, JP Morgan, UBS, Citigroup, Goldman Sachs, Credit Suisse, Morgan Stanley, Barclays Capital, and so on. These banks manage about 2/3 of the daily volume in Forex and form the so-called interbank market along with the other participants. These banks deal with each other on behalf of customers and provide this market with major speculative or corporate transactions and liquidity contributing to the proper functioning of Forex. These banks and dealers, which form the interbank market and are, in fact, market makers setting prices and managing its liquidity.

Role of brokers in Forex

While exchanging the local currency into foreign and vice versa in any office, you will see the difference between the sell price and the buy price. This difference is a profit from transactions for any financial broker and this principle is also applied to online trading in the Forex market. Currency and other financial instruments in Forex have two prices: ask and bid. The difference between the ask and bid prices is called spread. The value of spread is determined by the volume of all operations. Every time you open a trade position, spread is automatically and instantly deducted from a trader’s account. Thus, Forex brokers involve private brokers or entire corporations. It should be noted that banks often use brokers to be anonymous since the identity of a bank can impact short-term quotes.