## Comprehensive Guide to the Forex Market | Why Is Forex the World's Largest Trading Market?

### What exactly is the forex market? Why is it completely different from the stock market?

The forex market, officially known as the foreign exchange market, is a 24-hour decentralized trading environment. "Decentralized" here means there is no single controlling exchange; unlike the New York Stock Exchange which provides unified quotes, each forex broker's prices may vary slightly.

This characteristic leads to a direct consequence—**the bid and ask prices for the same currency pair can differ across platforms**. Therefore, traders need to understand the internal mechanics of the forex market to identify the best trading opportunities.

### The Hierarchical Structure of the Forex Market: From Banks to Retail Investors

If the forex market is a pyramid, then the top tier controls the pricing power.

**Top of the Pyramid: Interbank Market**

Global giants like Citibank, JPMorgan Chase, UBS, Barclays, Deutsche Bank, Goldman Sachs, HSBC, and Bank of America trade directly with each other, using electronic platforms like EBS Market and Thomson Reuters Matching for quotes. These banks hold the key to global forex liquidity—they execute hundreds of billions of dollars in transactions daily, constantly adjusting bid and ask prices based on supply and demand.

It’s important to note that while the quotes in the interbank market are visible to all participants, **trading eligibility depends on credit relationships**. Similar to applying for a bank loan, higher credit ratings mean better exchange rates and larger credit limits.

**Mid-tier: Institutional Investors and Corporations**

Hedge funds, trading companies, and multinational corporations access the forex market differently. They lack deep credit relationships with interbank banks and can only trade through commercial banks. This means the rates they see are usually slightly higher than interbank quotes—**cost differences arise from this**.

Additionally, governments and central banks operate at this level. Central banks influence the forex market through interest rate adjustments, currency interventions, or large-scale buying and selling operations. For example, the Bank of Japan is known for direct or verbal interventions; when they believe their currency is appreciating too quickly, they act immediately.

**Bottom of the Pyramid: Retail Investors**

The advent of the internet and retail brokers has completely transformed this ecosystem. Once dominated by banks, forex trading now has much lower barriers to entry, allowing ordinary retail investors to participate at relatively low costs.

### Who Drives Forex Market Volatility? A Participant Panorama

The daily trading volume of the forex market exceeds $6 trillion, driven by five types of participants:

**1. Major International Banks** — They set prices and lead trading flows

**2. Corporations and Commercial Banks** — For example, Apple needs to exchange USD when purchasing electronic components from Japan; such international trade transactions are numerous

**3. Central Banks and Governments** — The Federal Reserve, European Central Bank, Bank of England, etc., influence exchange rates indirectly or directly through policy adjustments

**4. Speculators** — They buy certain currencies expecting to sell at higher rates in the future; this uncertainty creates trading opportunities

**5. Retail Investors** — Participating through brokers, though individual influence is limited, their collective volume forms significant liquidity

### How Did the Forex Market Evolve Into Today’s Structure? A Historical Review

**1944: The Birth of the Bretton Woods System**

At the end of WWII, major Western economies signed agreements establishing the Bretton Woods system. The core was—**the US dollar was pegged to gold, and other currencies were pegged to the US dollar**, aiming to stabilize the global financial order.

**1971: System Collapse and the Era of Floating Rates**

However, due to differing economic growth rates, the fixed exchange rate system quickly became unsustainable. In 1971, Bretton Woods was abandoned, replaced by a **floating exchange rate system**—currencies now fluctuate based on market supply and demand rather than government-set rates.

Initially, this transition caused chaos, but with advances in computers and communication technology, the situation gradually stabilized.

**Post-1990s: The Internet Revolution Opens the Retail Door**

The proliferation of computers and the internet enabled banks to establish their own trading platforms. More critically, business professionals began developing retail forex broker platforms targeting individual investors. This marked a turning point, transitioning the forex market from institutional monopoly to democratization.

### The Broker Models in the Forex Market: Understanding Your Counterparty

Since retail investors can access the forex market, the intermediary role—brokers—becomes crucial. They mainly operate in two models:

**Model 1: Market Makers**

Market makers set their own bid and ask prices. When you exchange USD at a bank, that bank acts as a market maker—they decide the rate you get.

For example: a market maker quotes EUR/USD at a bid of 1.2000 and an ask of 1.2002, with a spread of 0.0002. **This 0.0002 is the market maker’s profit**. While small per trade, millions of such trades daily add up to huge revenue.

**Model 2: Electronic Communication Networks (ECN)**

ECN brokers aggregate the best bid and ask prices from interbank markets and automatically match client orders. Since traders can set their own prices, ECNs usually charge lower commissions. **Tighter spreads plus small commissions significantly reduce trading costs**, making them attractive to professional traders sensitive to costs.

### Why Is Now a Great Time to Start Learning About the Forex Market?

The forex market is no longer exclusive to banks and funds. With technological advances, retail traders now have access to tools comparable to institutional ones. Whether you want to hedge risks, speculate, or deepen your understanding of the global economy, the forex market is worth exploring.

The key is choosing the right broker and trading strategy to find your own opportunities in this largest global trading market.