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Chapter 3, Part I. The structure of the FOREX market. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 14, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Pipruit: But now I can’t quite understand how quotes for different currencies are almost the same all around the globe? I mean that a big bank and a small broker have almost the same quotes. Why do the quotes have such very small deviations on different hypothetical levels?​

    Commander in Pips: Well, the answer is obvious. The major transaction volume is through the Central Banks. So they estimate and transfer their quotes to large banks. Large banks, in turn, transfer them lower to smaller banks and so on until you will see these quotes from your FX broker on your computer. Due to pure electronic quoting and transaction systems, these quotes are transferred during a fraction of a second. If someone on the lower levels will try to skew quotes to one or another side, trying to make money, they can end up getting a really big loss, because they have to predict the quotes from the higher levels. There is too much risk with it. Banks are the most highly regulated authorities and any unwelcome loss on a balance sheet is very dangerous. They just make Bid/Ask spread a bit wider to make their own money, and transfer the quotes down to lower levels. That’s much safer and simpler.

    Pipruit: Does this mean that big banks trade with tighter Bid/Ask spread than we do?​

    Commander in Pips: Absolutely, they even can trade without any spread, at least on major pairs.

    Pipruit: It sounds logical, because volumes are much greater than on the lower levels.​

    Commander in Pips: That’s right. So let’s try to imagine all this stuff in pictures:



    Pipruit: Wow, wow, wow – hold your horses… Please not so fast. I’m totally messed up in this picture – it looks like absolute chaos out there. Say, we’ve just discussed that FOREX has a structure and then you show me this chaos.​

    Commander in Pips: What’s wrong, son?

    Pipruit: How this chaos could function at all!​
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