Although the foreign exchange market is scattered, it is not simple or completely disorderly. Foreign exchange market participants can have different levels of organizations.
See the figure below for details:
First, the first level
At the top of the foreign exchange market hierarchy is the interbank market, which is also the most liquid market at the top.
This market consists of central banks and large banks all over the world. Participants in this market directly trade with each other or conduct 3000-point matchmaking transactions through EBS or Reuters.
EBS and Reuters Stock Exchange 3000 (note: at present, the main trading settlement platforms in Reuters are Matching, FXALL and Thomson Reuters SEF, a swap execution facility) have the same relationship as Coca-Cola and Pepsi.
They are competing for each other's market share.
All banks participating in the inter-bank foreign exchange market can see the exchange rate quotations provided by them, but this does not mean that anyone can trade at these prices. Just like real life, the interest rate price in the interbank market mainly depends on the established credit relationship between trading partners.
For example: "brotherhood price", "hardcore customer price" or "long-term cooperation price" and so on.
At the same time, the maximum liquidity access threshold is very high, which requires a high amount of funds, ranging from one million to ten million dollars, to ensure a guaranteed income every month, so it is almost impossible for ordinary platforms and investors to directly access.
Therefore, most retail foreign exchange brokers do not directly contact with big banks, but obtain liquidity (referred to as flow) through liquidity providers (LP).
B, the second level
Because of the high threshold of the first level, the foreign exchange market came into being the second level: liquid suppliers referred to as foreign exchange LP.
This level includes liquidity suppliers, small and medium-sized banks and small and medium-sized fund companies.
They provide liquidity services for non-interbank market participants, including grabbing the best price feedback from downstream retail foreign exchange brokers and investors, and clearing customer orders from primary market recipients.
C, the third level
The next floor of large, medium and small banks, that is, the third floor, is hedge funds, large institutions, retail market makers and retail ECN trading networks.
Because these institutions have no close credit relationship with the participants in the interbank market, they need to conduct transactions through commercial banks. This means that their interest rate quotations are slightly higher than those of participants in the interbank market.
D, level 4
Investors (retail investors) are the last level of the whole foreign exchange market structure. Whether individual traders or institutional traders, their sole purpose in this market is to buy low and sell high and make profits.