Compared with the stock market, the foreign exchange market has many advantages, but the operation logic of the foreign exchange market is more complicated than that of the stock market. Many friends who are new to the market find it difficult to understand. Today we will talk about the operation logic of foreign exchange brokers and the foreign exchange market.
Look at this picture, which basically clarifies the structural relationships among traders, foreign exchange brokers, liquidity providers, and clearing banks.
Let's first look at the relationship between traders and brokers
For retail traders, they only need to deal with foreign exchange brokers. Most of the foreign exchange brokers that retail investors come into contact with are divided into A channel and B channel.
In the case of channel A, the platform will not digest the orders of traders, and all transactions will be thrown to the foreign exchange market through liquidity providers. The broker earns a certain spread fee or handling fee
In the case of channel B, the orders submitted by traders will not be thrown into the foreign exchange market through liquidity providers, but will be directly digested by brokers. Brokers and traders form a counterparty relationship. If traders make profits, brokers lose money. On the contrary, if the trader loses money, the broker makes money.
Here I would like to add that this approach is unacceptable in the perception of the vast majority of domestic investors, calling this approach "gambling against each other". In foreign countries, the practice of "gambling against each other" between brokers and traders is legal, as long as you obtain the relevant regulatory license, it is allowed to do so under supervision. Most of the platforms basically have two channels of AB, that is, there are both "selling orders" and "gambling", but it is only a matter of proportion. If it is a black platform, then it is basically 100% B channel. Traders Completely bet against the platform.
Let’s take a look at the relationship between the platform and liquidity providers
Forex broker A channel transaction order, when the broker receives the order, it will be connected to the LP through EBS, Bloomberg and other transaction matching systems, that is, the liquidity provider. These matching transaction systems generally only provide transaction matching services. Not involved in transactions, of course, there are some matching systems that also act as LPs, such as giants such as Bloomberg and Reuters.
A platform generally connects with several LPs at the same time. For the same trading product, the quotations of different LPs may be different. The platform will select the LP with the best quotation to complete the transaction of this product.
In essence, LP is also a middleman, and will eventually connect to the clearing bank. Generally, one LP will also connect to several clearing banks at the same time.
Finally we take a look at the top players in the foreign exchange market, namely the clearing banks
LP finally connects traders' orders to clearing banks, mainly major banks, central banks, and consortiums, such as Citigroup, JPMorgan Chase, Deutsche Bank, UBS, Barclays, Merrill Lynch, etc. They are the top players in the foreign exchange market, the ultimate market makers.
The transactions between LP and the clearing bank are all unleveraged, usually huge in size, and the transaction amount is in units of "100 million". Can all banks become clearing banks? The answer is of course no. To become a clearing bank, one of the most basic requirements is strong capital and deep pockets. Ordinary small banks will definitely not be able to play without this financial strength. There are a few hundred million orders here, and a few hundred million orders there. If you can't take over, you can't make a market, so it is the top international investment bank that can become a clearing bank.
After talking about these relationships in the foreign exchange market, let's take a comprehensive look.
To some extent, the foreign exchange market is a collection of large and small casinos, where traders and brokers have a certain proportion of gambling; the platform connects orders to LPs, allowing LPs and traders to form a gambling relationship, and LPs are liquidated Banks allow traders to form a gambling relationship with big banks.
Compared with more professional institutional banks, ordinary traders are of course at a disadvantage, so it is difficult for most traders to make stable profits in the market. Of course, nothing is absolute, and there have been times in history when banks failed to bet against each other and went bankrupt and liquidated. Generally speaking, the foreign exchange market is a relatively fair market. Even a big bank can't do whatever it wants. As long as you are good enough, you can make profits from it.
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