In order to understand how the currency exchange rates appear on our trading screens, we first need to analyse the various players involved in the market, and not only their primary function, but also their motivation, given their position in the food chain. I apologise for using the term food chain, but it is the only one that adequately describes the hierarchy of the $orex marketd in particular our position as retail forex traders, which in case you didn’t know, is at the bottom. We are the trading accounts that generate all the money for everyone else to live on, and you will do well to remember this fact whilst reading the remainder of this site. There is no such thing as a free lunch, and anything that is free has strings attached. A free demo account is not free, and a free trading account is anything but free! You will be paying for this somewhere, although this will be well hidden from you, and the illusion will be created of a free trading system, which is generally how the whole forex market is sold to the retail trader. Commission free trading does not exist and never will – $orex brokerse to eat, just like the rest of us! So how does the forex market work and who creates the foreign exchange price feeds? Let’s look at all the major players, and given that this is the largest market in the world, it also has the most varied participants, as we will see. For simplicity I have broken these down into the four major groups which I have called, market makers, corporate accounts, speculators and finally the central banks. So let’s start at the centre of the spiders web with the central banks.

Central Banks

The central banks act as the central exchange for the forex market (with the fox in charge of the hen house), but of course whilst they are regulated as a bank, they are unregulated as far as their currency trading activities are concerned, and as such are allowed free reign to push the market one way and the other to suit their own trading objectives. It is also important to understand why the banks have grabbed the FX market by the throat. The nirvana for any bank is to earn income from what is called ‘off the balance sheet’, and this is where the FX market delivers in abundance, with millions in profit every day. All that is required is for the bank to set up a forex dealing desk, along with a proprietary trading group, and fairly soon the money starts rolling in to the coffers! Most of the central banks now operate in one of two ways. The first is by offering their own electronic dealing platform, or alternatively by providing liquidity to a matching prime brokerage platform using one of the three major providers such as Currenex, EBS or FXAll. These are the three biggest, and represent the professional end of the fx live feed market, and are way beyond the budget of most retail traders. It will be one of these feeds, or something similar, that will eventually find its way to your humble forex platform on your pc. If you can afford to subscribe to one of these feeds direct, then you will effectively be trading at the ‘central exchange’ of FX, along with the major banks, and as such will get the latest quotes, the tightest spreads, and the deepest pool of liquidity, as well as the ability to see the depth of the market at any time. The chances are that your broker or dealer will ultimately be using one of these three, either in a prime brokerage capacity or as a white label, with all that this entails. Remember, the further you are away from the market, the more you will suffer in terms of price manipulation, lack of transparency, lagging prices, and outright malpractice which many forex traders seem oblivious to, when they first enter the forex market as an innocent. Whilst you may never be able to justify such a high grade data feed, at least if you understand where the data is coming from you can understand where the broker is getting his prices. All of the above feeds will be generated from the liquidity pool of trading generated from the following major banks, who dominate the forex market:

  • Deutsche Bank  – 20 % fx market share
  • UBS – 12% fx market share
  • Citigroup – 11% fx market share
  • Barclay’s Capital – 7% fx market share
  • RBS – 7% fx market share
  • Goldman Sachs – 5% fx market share
  • HSBC – 5% fx market share
  • Bank of America – 4% fx market share
  • JP Morgan Chase – 4% fx market share
  • Merrill Lynch – 4% fx market share

Whilst the central banks provide the liquidity pool for the latest forex prices, as well as simultaneously trading their own accounts, they also have a deep loathing of the rest of the market players, and in particular public enemy number one, which is the speculator. This unfortunately is the group that we, as retail forex traders occupy, and whilst we are a tiny fish in an enormous pond, the speculative group is often blamed for the woes of the world, with governments and agencies intermittently banning short selling when a currency comes under threat. As a result, the banks will take any action necessary to try to prevent the speculators from precipitating sustained falls in a currencies value, to the extent that they will move as a group to push forex rates higher in order to panic the market and shake the speculators out of short positions and into short covering to protect their positions. This type of price action is becoming increasingly evident with the pressure on the euro increasing daily, and yet the euro usd continues to rise, despite the dire warning in Europe and from the ratings agencies such as Moodys and Fitch. With the ten banks above controlling almost 80% of the  market and with no regulation, it is little wonder that this happens day in and day out, and goes some way to explain the volatile and unexpected movements in the market that occur from time to time, and which cannot be explained by the irrationality of the markets alone. These then are the shark infested waters in which we willingly swim every day – and this is just the start! Let’s look at another group known as the market makers.