06 FOREX Market Structure

Who makes up the FOREX Market Structure? Learn the Forex markets are structured from the interbank all the way through to retail customers.

The Interbank Market is at the top of the food chain, they are the top tier player in the FX markets.

The Interbank market has the tightest spreads, they are effectively making the markets, then every tier you move down, each corporation takes a little slice (like most businesses).
So the spread gets wider and wider the further you go down the food chain.

GLS Equity FOREX Market Structure
Tier 1 – Interbank

The Interbank market is the top-level foreign exchange market where large global banks like Barclays, Deutsche Bank, HSBC, JP Morgan Chase and Citigroup exchange different currencies, and they do it in BIG lots (millions & billions of dollars).

The Interbank market accounts for About 40% of all global FX transactions and the top 10 of these banks make up more than 75% of that.

These banks either deal with one another directly, or through electronic brokering platforms.
The two major electronic platforms are Electronic Broking Services (EBS) and Thomson Reuters, together these two platforms connect over 1,000 banks together.

GLS Equity Interbank

The interbank market is effectively where the foreign exchange market starts, they are the wholesale market.
They make the market and then pass on prices to the firms on the next level below (after they widen the spread a little of course).

Tier 2 – Large Brokers

Large brokers deal directly with the large individual banks in the Interbank market, this is where they get their price feeds and liquidity from.

They then pass this pricing on to us retail traders (after they widen the spread a little more of course…). Some smaller brokers have an extra step and will go through a bigger broker and then to the Interbank.

So in this case you would have another party clipping the ticket, and the spreads will be slightly wider again.

Here you can see the Interbank which makes the market, they then increase the spread a little and pass this price onto the brokers.

GLS Equity Forex Brokers
Note: more on understanding “Pips” in section 08 Pricing Lots Pips Spread.

Tier 2 – Banks

Most global retail banks deal directly with the large individual banks in the Interbank market, this is where they get their price feeds and liquidity from.

They then pass this pricing on retail currency exchanges (like when you go to the airport and get cash changed) and to companies and individual bank customers (after they widen the spread a little more of course…)

Most companies will deal through these retail banks, but the larger companies like Apple, Toyota, Walmart etc. will actually have a direct link to some of the larger banks in the Interbank market.

Here you can see the Interbank which makes the market, they then increase the spread a little and pass this price onto the Retail Banks and Large Global Companies.

GLS Equity Retail Banks

Tier 2 – Investment Companies

The larger investment companies, mutual funds, pension funds and hedge funds deal directly with the large individual banks in the Interbank market, this is where they get their pricing from.

Many of them are speculators in the FX markets, but even if they are not directly trading FX the large volumes of other investments can have substantial currency Risk.
This is something they need to hedge and these hedges / trades can be very large when you look at some of the AUM (Assets Under Management) some of these funds have.

Here you can see the Interbank which makes the market, they then increase the spread a little and pass this price onto the Investment Companies.

GLS Equity Investment Companies

Tier 3 – Retail Traders

Most retail traders individually trade very low volume, but there are a lot of us!

And over the years the retail trader has grown in popularity exponentially. Today our combined trading adds a significant amount of volume to the FX markets. Many retail traders would love the tight spreads offered by the Interbank market. But if we could trade directly with them there would be no Micro or Mini lots traded and even the std lots would need to be traded in multiple yards (Billions).

So not only do these retail brokers make it possible for us smaller traders to participate, but they also make it easier by providing useful trading software, support and training.

Here you can see the Interbank which makes the market, they then increase the spread a little and pass this price onto the brokers, who then also increase the spread a little further and then pass this price onto us, the retail traders.

GLS Equity Retail Traders

Tier 3 – Currency Exchange Stores

These smaller companies keep multiple currencies in cash for their individual customers to convert.

You will generally find these currency exchange businesses located near airports and travel agent businesses. They are very useful for people that are traveling, but because of their physical stores and having the cash sitting on hand (earning nothing) their spreads will generally be the highest.

If you go to a currency exchange and change a few thousand dollars into another currency the rate they will give you will be significantly worse than what you will see at your FX brokerage firm (well it should be anyway).

Here you can see the Interbank which makes the market, they then increase the spread a little and pass this price onto the retail banks, who then also increase the spread a little further and pass this price onto the currency exchange companies.

GLS Equity Currency Exchanges

Tier 3 – International Companies

More and more businesses are dealing internationally these days, whether it is from importing products from manufactures in China and selling in their local country, or just selling internationally via their websites.

Either way the internet has made communication so much faster, cheaper and easier that this is becoming big business, sure most of these companies only deal in smaller quantities, but like the retail traders, they add up. And like we said before, the global super companies will be directly dealing with the interbank.

What do you think Apples daily FX turnover would be?

Here you can see the Interbank which makes the market, they then increase the spread a little and pass this price onto the retail banks, who then also increase the spread a little further and pass this price onto the international companies.

GLS Equity International Companies

Tier 4 – Retail Customers

If you live in Australia and need $100 USD in cold hard cash, what do you do?

Well, you either go to your local bank and hope they have it in stock, or you go to a local currency exchange. This is effectively the bottom of the food chain and as the world moves further away from dealing in cash, these outlets will become more and more obsolete (and more and more expensive).

Here you can see the Interbank which makes the market, they then increase the spread a little and pass this price onto the retail banks, who then also increase the spread a little further and pass this price onto the currency exchanges, who then mark up the price a little further before providing a price to the retail customers.

GLS Equity Retail Customers

Summary

So like with most things it comes down to volume.

The more shoes you buy from your manufacture the better the deal they will give you. The more shares you trade, the better the commission will be from your broker.
And the more FX volume you trade, the further you can move up the food chain and the better pricing you will get!


Looking for a good automated trading solution?
See our top Forex trading robots here. They have proven results are professional programmed, simple to use and most offer free trials.

Or if you have a strategy or idea you would like programed check out FastMT4Coding. These guys can help with all your MT4 Indicators and Expert Advisor requirements.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top