Lesson 3: The structure of Forex trading
Below is a hierarchy of different people who use foreign exchange for their day to day activities, these different bodies help to make up the structure of Forex trading
Major Banks and Governments
These are comprised of the world’s largest banks. They trade currency between each other in accordance with their exchange rates, known as the interbank market. Governments also need large amounts of foreign reserves in order to trade products and services with other countries.
Reuters Dealing 3000
The original currency dealing company for banks, formed in 1999. The banks use these brokers to trade with each other.
Electronic Broking service (EBS)
The company formed as competition to Reuters. It competes with Reuters for clients and the best deals in brokering trade between banks
Small and Medium sized banks
These entities also trade with each other and the larger banks through the two above companies in order to buy and sell currency.
Retail Market makersThey set the exchange rates, for example, people who want to go on holiday to Spain and need to exchange pound sterling for Euros. A small commission is charged in the form of bid/ask spread.
Retail ECNs (electronics Communications network)
These are the brokers who provide accounts for traders, virtual amounts of money to buy and sell currency with, and leverage in order to trade on Forex.
Hedge funds and commercial companies
Private businesses, that trade in currency via commercial banks. For example Ford has to exchange US dollars into yen in order to buy car parts from Japan.
Retail traders (like you)
Individual traders like you, who trade electronically, speculate on exchange rates and navigate the waters in order to make personal cash. These add liquidity to the market and help keep the financial world turning.