Hierarchy and Forex Market Structure that Traders Should Know

Not many traders, aka traders, understand the real forex market structure, including realizing how you position yourself.

Beginner traders must know if they really intend to make a trader a profession in order to later become a professional trader.

Literally, the Forex Market is a decentralized global market in which all the world’s currencies are traded, and traders can profit or lose from changes in the value of these currencies.

Also read: History of Forex Trading: From Era of Gold to Online Trading Like Now

Traders in the forex market generally come from various groups, including Governments, Banks and Financial Institutions, Multinational Companies, Speculators, Brokers, and individual forex traders.

Just for the record, all forex traders here do not have the ability to determine market prices.

However, not all traders have an equal position. This is due to the non-centralized structure of the forex market, in contrast to the centralized stock market.

In stock trading, the structure is centralized. That is, all activities of sellers and buyers are centered on the stock exchange (Stock Exchange). All companies as issuers of shares and investors as buyers usually meet on the stock exchange floor.

Although today’s technological developments also force stock trading to be done online, the system is still centered on the stock exchange.

Also read: Top 4 Forex Trading Risks You Must Understand, Don’t Lose!

In contrast to the stock market, forex trading is arguably more flexible because it does not have such a center and takes place outside the exchange (over-the-counter/OTC).

At first glance, the structure of this decentralized forex market looks disheveled. Evidently, how each forex market participant can make transactions with each other, either directly, or through an intermediary broker or bank.

They can directly transact with each other without the help of stock exchange intermediaries like stocks. Although it seems random, traders can be described in a certain hierarchy.

What is Forex Market Structure

Basically, the Forex Market is a decentralized global market where all the world’s currencies are traded, and traders make profits or losses from changes in currency values.

Buyers in this market include various groups, including Governments, Banks and Financial Institutions, Multinational Companies, Speculators, Brokers, and forex traders from among the average person.

However, even though all forex traders do not have the ability to determine prices, not all traders are equal.

Also read: Simple Guide How to Make Money From Forex Trading Up To US$1000

Why is that? This is because the structure of the forex market is not centralized, in contrast to the stock market which is centralized. If described, the structure of the stock market is as follows.

hierarchy and forex market structure

As shown in the figure, stock trading is centralized. That is, all activities of sellers and buyers are centered on the stock exchange (Stock Exchange). Companies as issuers of shares and investors as buyers are brought together by the stock exchange.

Even though today’s stock trading is done online, the system is still centralized on the stock exchange. However, Forex trading does not have such a center and takes place off the exchange (over-the-counter/OTC).

hierarchy and forex market structure

Notice how each forex market participant transacts with each other directly or through brokers and banks, without the intermediary of a particular exchange.

At first glance, the structure of the forex market that is not centralized seems messy, but actually forex traders can be described in a certain hierarchy.

Also read: 6 Reasons and Advantages of Forex Trading that You Must Know

What is Forex Market Hierarchy

The forex market hierarchy is the structure in the forex market, from the highest to the lowest.

The topmost position in this hierarchy is occupied by a network formed by transactions of major banks, also known as interbanks.

The major banks are Citi, JP Morgan Chase, UBS, Deutsche Bank, Goldman Sachs, Barclays, HSBC, Morgan Stanley, and so on.

hierarchy and forex market structure

Also read: The 6 Type Forex Market Participants In The World

The Interbank Network, which occupies the highest hierarchy, consists of the world’s central banks, major banks, and several smaller banks.

They trade directly with each other or electronically through Electronic Brokering Services (EBS) or Reuters Dealing 3000-Spot Matching.

On the EBS platform, the more liquid currency pairs are EUR/USD, USD/JPY, EUR/JPY, EUR/CHF and USD/CHF.

Meanwhile, on the Reuters platform, the more liquid pairs are the GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and NZD/USD currency pairs.

Under Interbank there are traders called retail market maker brokers, retail ECN brokers, and Hedge Funds. After that, at the very bottom there are retail traders, such as individual traders.

Retail traders like us seem to be grateful to the internet, electronic trading technology, and retail brokers, because thanks to them we can reap “a slice” of the benefits of this huge market.

The structure of the forex market may seem messy, but that is what makes forex trading a business that is different from others.

When trading in the market alias giant market, our mainstay will be the sharpness of our own analysis in deciding prices carefully, at the right time. When is the right time? Check out the next review in the article of Best Time and Hours for Forex Trading.

PROOF CODE: