FX Market Structure

• The FX market is an over-the-counter market with no centralized exchange.
• Traders have a choice between firms that offer trade-clearing services.

Unlike many major equities and futures markets, the structure of the FX market is highly decentralized. This means that there is no central location where trades occur. The New York Stock Exchange, for example, is a totally centralized exchange. All orders pertaining to the purchase or sale of a stock listed on the NYSE are routed to the same dealer and pass through the hands of a single clearing firm. This structure requires buyers and sellers to meet at the NYSE in order to trade a stock that is listed on this exchange. It is for this reason that there is one universally quoted price for a stock at any given time.

In the FX market there are multiple dealers whose business is to unite buyers and sellers. Each dealer has the ability and the authority to execute trades independently of each other. This structure is inherently competitive as traders are faced with a choice between a variety of firms with an equal ability to execute their trades. The firm that offers the best services and execution will capitalize on this market efficiency by attracting the most traders. In the equities markets, the execution of trades is monopolized and there is no incentive for a clearing firm to offer competitive prices, to innovate, or to improve the quality of their service.

DISCUSSION

The FX market has clear advantages over the equities markets in terms of efficiencies created by decentralization and competition. How does the nature of this market structure effect a trader's profitability?

On the equities market at all stock exchanges all your orders are put through same dealer and pass through a single clearing firm this is why you get same price on stock world wide, now on the FX market there are loads of dealers and they can all excecute trades on there own, so you can get better rates on your trades ie the spreads that some providers offer is far better than others so on every winning trade you take makes you more profitable whereby on equities the only saving you can really make is on your broker.

You are correct, due to the fact that the FX market is a 'decentralized' market; market makers and dealers from around the world are continuously competing against one another. This inherently leads to tighter spreads as the buying and selling price of each currency draw closer together. Traders have their choice where they would prefer to trade, as they are not limited to one 'specialist' as is the case when trading with the NYSE.

In addition, unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or which way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. Hence, a trader has an equal access to trade in a rising or falling market. Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or which way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. Hence, a trader has an equal access to trade in a rising or falling market.

The main advantage of the FX market over the NYSE is that the multiple dealers are in competition with each other and this price transparency makes for a better market. Competition keeps the spreads tight and therefore a better market to trade in

Great point, in addition, due to the fact that the FX market is open 24-hours a day, traders do not take the same "overnight" risk they assume when the NYSE closes everyday. In addition, trading the FX market is generally commission free, so we can trade more efficiently. More importantly, because of the enormous liquidity in the market, the technical indicators tend to provide more reliable signals on a day-to-day basis.

High Liquidity in the FX market is its biggest asset which results in more potential to spot trends and make trades.

Great point, the currency market is the most liquid and widely traded market in the world. The daily volume exceeds $1.9 trillion per day, roughly 30 times the volume of all U.S stock markets. Buyers and sellers including all the worlds’ largest banks, make markets 24-hours a day, creating one cohesive, international market. The consistent liquidity of this market provides currency traders with the ability to enter and exit trades regardless of the size of the transaction or time of day.