As you have gained some basic ideas about what is forex and how the forex works, you should get the knowledge of the structure of forex. In this articles, you will be provided with real life examples to broaden and widen your window of partial understanding into a single piece of completed knowledge of forex market structure.
To clearly understand you the market structure of Forex, we will begin with a market that you are accustomed to its structure. Here we will talk about the stock market structure.
Figure: Cash flow in the forex market
You have probably sensed that this is the structure of a stock market. Stock markets are the centralized market. Which means, there is one authority who reigns over the stock market. The prices of trades which are being traded on the stock market exchanges, therefore, are altered by the authority to benefit the authority, not the buyers.
In this sense, you can say the stock market as being a monopoly market. The stock market, indeed, is a monopoly. It is controlled by a powerful authority and it will do whatever it takes to financially rewards its clients.
Forex: A decentralized Market
The structure of forex market is not the same. It is a large market and therefore, it is not possible to control the trades by a single power. It is more like a decentralized market. Here is a graph of a decentralized market to make you understand the process.
Figure: Decentralized forex market
At first, this chart might blow your mind. But this chart is not at all complex as you might have guessed by looking at the chart. These millions of buyers are sellers which are present in the Forex market gives you the wonderful opportunity every time you trade, because each one here is independent, with their own choices.
Think of an example that will better help you to understand the benefits of having a decentralized market. You might not get the 1970 Plymouth Hemi Superbird car for your, even brand new Hyundai car. Your one office colleague’s father might have it, but he is most likely not to share this collection of rare American automobile historic car. But in a decentralized market, you can easily find Peter, who owns the car, in exchange for some thousands of dollars. This is only possible in a decentralized market, each trader having their different views about their trades. This is why forex is so wondrous opportunity to increase your money and find a perfect trade for you. Figure: Perfect opportunity for making money
Infrastructure of the forex market
As you have gained an idea about the Forex market, it is time for you to be familiar with the Forex structure. The structure of Forex market is usually referred as The FX ladder.
Figure: Tower of the forex market
This tower represents here the FX Ladder. Just like a ladder has many upper steps and lower steps, this ladder has also many upper players and lower players in the FX market.
The most upper step of the ladder is composed of the world’s largest banks. They control the major trades of forex market trading. These largest banks and the small banks communicate with each other through the help of the second step of the ladder that is Electronic Brokering Services (EBS) or the Reuters Dealing 3000-Spot Matching.
It does not mean that the banks only communicate with this system. The Electronic Brokering Services (EBS) or the Reuters Dealing 3000-Spot Matching are in a tug of war between controlling the market share. Their customers are the same and they constantly try to gain the largest share of the same market of the others.
The next step is the smaller banks. As we have discussed before, they communicate with the EBS with the largest banks.
The next on the ladder is the retail market makers, and retail ECNs, hedge funds, and commercial companies. They are just the above ladder of the smallest step of the FX ladder.
At the very bottom of the part, here is the place where you and I stay and make money in the Forex Trade. All the millions of buyers and sellers in the FX market stays in this step of the ladder. But do not underestimate this step as it the step where billions of transactions are placed which make the FX market make trillions of dollars.
This is the simplest of the forex structure here you could understand. As you go from being a rookie to a pro player in the FX trade, you will find the hidden steps to make money from your online trading on the Forex market.