Forex market structure and participants
6 min readLesson 9
Who is on the other side of your trade, and why it matters.
The forex market is a network, not a building. Prices form where the largest participants trade with each other, and every other price is derived from that core.
The layers of the market
- Interbank market. The largest banks quote prices to each other and to large clients. Most volume passes through a handful of global dealing desks.
- Electronic platforms and ECNs. Electronic communication networks collect quotes from many banks and let institutions trade against the best available price.
- Brokers and liquidity providers. They connect funds, companies and retail platforms to the layers above.
- Retail traders. Individuals trading through brokers and platforms, the smallest layer by volume.
Who trades and why
| Participant | Main reason to trade |
|---|---|
| Central banks | Manage reserves, sometimes intervene to steady their currency |
| Commercial banks | Serve clients and trade their own books |
| Companies | Pay suppliers and protect profits earned abroad (hedging) |
| Asset managers | Buy foreign shares and bonds, hedge currency exposure |
| Hedge funds | Speculate on macroeconomic themes |
| Retail traders | Speculate on short- and medium-term moves |
Why this matters for you
Most currency volume is not speculation. It is companies and funds that must trade regardless of price. Their flows create the trends and the liquidity you trade. When they are absent, such as late on a Friday or during holidays, liquidity is thin and moves can be erratic.
Central banks deserve special attention. A surprise rate decision or an intervention can move a currency more in a minute than in the rest of the week.
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