The structure of the forex market refers to its broad framework that consists on three tiers namely the interbank market, large retail banks and funds and retail foreign exchange firms. The structure of the forex market will help you understand how foreign exchange transactions go through. The breakdown of each tier and the interaction between them is mentioned below:
– Interbank Market: The Interbank market comprises on the largest banks and central banks. The large commercial banks and the central bank trade currencies via a system known as EBS. EBS can simply be defined as the software application. It provides the interbank participants of the forex market with bank’s resources helping them understand the supply and demand. Depending upon the supply and demand conditions, the participants can develop fair prices to trade with each other.
– Retail Banks: Retail banks allow the customers to exchange currencies. When people exchange currencies, the retail banks move the currency around from one branch to another. The retail banks earn profit with the help of spread, a different price for buying than for selling. In case the retail banks need a particular currency, they approach to the tier above them which is the interbank market.
– Retail Forex Brokers: The retail foreign exchange brokers allow the individual traders to open accounts with them to trade currencies in the forex market. Generally, the retail forex brokers have good relations with interbanks and retail banks because they need to take prices from them. How does retail forex trader offer prices to retail traders? In simple words, they take prices from the interbanks banks retail banks, add a markup and offer the new prices to the retailer traders.
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