Forex as an OTC Marketplace (Not a Single Exchange)
The forex market is an over-the-counter (OTC) network: prices are not produced by one centralized exchange. Instead, many institutions quote prices to each other and to brokers through electronic venues and bilateral relationships. What you see on your trading platform is a broker’s stream of prices derived from one or more liquidity sources, plus the broker’s own markup or commission model.
Because it is OTC, two traders at different brokers can see slightly different quotes at the same moment. In normal conditions the differences are small, but during fast markets (news, session overlaps, thin liquidity) the differences can widen.
How Prices Are Formed: Liquidity Providers, Brokers, and Order Flow
At any moment, a currency pair has a bid (price to sell) and an ask (price to buy). The difference is the spread. In OTC forex, bid/ask comes from a chain of quoting and aggregation:
- Liquidity providers (LPs) (often banks or non-bank market makers) continuously quote bid/ask prices and available sizes. They manage inventory risk and adjust quotes based on volatility, competition, and their exposure.
- Aggregators combine quotes from multiple LPs and select the best bid and best ask (and sometimes depth at multiple price levels).
- Brokers deliver a tradable quote to clients. Depending on the model, the broker may pass orders to LPs (agency/STP/ECN-style routing) or internalize some flow (dealing-desk/market-maker style). Either way, the displayed quote is the broker’s executable stream, not a universal “official” price.
- Order flow (client buys/sells) changes the broker’s and/or LP’s exposure. That exposure influences how aggressively they quote. Heavy buying pressure can lift offers (ask) and pull bids higher; heavy selling pressure can push bids down and offers lower.
In practice, price is a moving consensus across many quoting entities. When liquidity is abundant and competition is high, spreads tend to be tighter. When liquidity is thin or risk is high, spreads widen and execution may slip.
Global Trading Day: Sessions and Why Overlaps Matter
Forex trades 24 hours a day from Monday to Friday because major financial centers open and close in sequence. Traders often describe three main sessions:
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- Asia session: typically lower average volatility in many major pairs, with notable activity in JPY, AUD, NZD, and regional flows.
- London session: often the highest liquidity of the day; many institutional participants are active; spreads are frequently tight in major pairs.
- New York session: high activity, especially early in the session; USD-related pairs can move strongly, particularly around US data releases.
Session Overlaps: Volatility and Spreads
Overlaps occur when two major centers are open at the same time. Overlaps often increase liquidity and trading activity, but they can also increase volatility because more participants are reacting to the same information simultaneously.
- London–New York overlap: commonly the most active period for many major pairs. Liquidity is deep, but volatility can spike around economic releases. Spreads are often tight in calm conditions, yet can widen abruptly during news or sudden order imbalances.
- Asia–London overlap: shorter and usually less intense than London–New York, but can still matter for pairs involving EUR/GBP and JPY crosses as Europe comes online.
Key practical takeaway: tight spreads are most likely when liquidity is high and markets are calm. During overlaps, liquidity can be high, but the probability of fast moves is also higher—so spreads can be tight one moment and wider the next.
Key Participants and What They Typically Do
Banks and Liquidity Providers
Large banks and non-bank market makers provide two-way quotes (bid/ask) and warehouse risk. They earn from spreads, internal hedging efficiency, and managing inventory. They also facilitate client transactions for corporations and funds.
Hedge Funds and Asset Managers
Funds trade to express macro views, hedge international exposures, or implement systematic strategies. Their orders can be large and can influence short-term price when executed aggressively or when liquidity is thin.
Corporations (Commercial Participants)
Corporations use forex primarily for business needs: paying suppliers, receiving foreign revenue, hedging future cash flows, and managing currency risk. Their activity is often linked to real-world transactions rather than short-term speculation.
Central Banks (Policy-Driven Participants)
Central banks influence currency values through interest-rate policy, communications, and sometimes direct market operations. Even when they are not actively trading, their decisions and guidance can reshape expectations and reprice currencies.
Retail Traders
Retail traders access forex through brokers, typically using leveraged accounts and standardized contract sizes. Retail flow is usually small compared to institutions, but it can cluster around popular levels and news events, contributing to short-term order flow patterns.
Basic Trade Lifecycle: From Quote to Realized P/L
This walkthrough shows what happens in a typical retail platform trade, from the moment you see a quote to the moment profit/loss is realized in your account currency.
Step 1: Quote Display (Bid/Ask) and What You Can Actually Trade
Your platform shows a live quote such as:
EUR/USD Bid 1.08490 Ask 1.08505- If you want to buy EUR/USD, you generally trade at the ask (1.08505).
- If you want to sell EUR/USD, you generally trade at the bid (1.08490).
- The spread here is
1.08505 - 1.08490 = 0.00015(1.5 pips).
Important: the displayed quote is only meaningful if it is executable. In fast markets, the quote can change between click and fill.
Step 2: Choose Order Type (Market, Limit, Stop, Stop-Limit)
| Order type | What it does | Typical use |
|---|---|---|
| Market | Executes immediately at the best available price | Entering/exiting quickly; accepting possible slippage |
| Limit | Executes at your price or better | Buying lower or selling higher; controlling entry price |
| Stop | Triggers when price reaches a level; becomes a market order | Breakout entries; protective stop-loss |
| Stop-limit | Triggers at a level, then becomes a limit order | More price control, but risk of no fill in fast moves |
Two practical points beginners often miss:
- A stop-loss is usually a stop order. In a gap or fast move, it can fill worse than the stop price (slippage).
- A limit order controls price but not execution certainty. If price touches briefly and liquidity is thin, you may get a partial fill or no fill.
Step 3: Execution and Fill Mechanics (Including Slippage and Partial Fills)
When you place an order, the broker routes it according to its execution model and available liquidity. Your trade confirmation typically includes:
- Requested price (for market orders, this is approximate)
- Fill price (the actual executed price)
- Filled size (may be partial if liquidity is limited)
- Time stamp and sometimes a liquidity venue or execution ID
Slippage is the difference between expected and filled price. It can be negative (worse) or positive (better). Slippage tends to increase when spreads widen, liquidity thins, or price moves quickly (news, overlaps, market opens).
Step 4: Position, Floating P/L, and Spread Cost
After execution, you hold a position that is marked-to-market using current bid/ask:
- If you are long (bought), your position is typically valued using the bid (because you would sell at the bid to close).
- If you are short (sold), your position is typically valued using the ask (because you would buy at the ask to close).
This is why a new trade often shows an immediate small loss: you entered at one side of the spread and would exit at the other side.
Step 5: Closing the Trade and Realizing P/L
Profit/loss becomes realized when you close the position (or it is closed by a stop-loss/take-profit). The realized P/L is then reflected in your account balance (as opposed to floating equity).
Example (account currency = USD):
- You buy 10,000 EUR/USD at 1.08505.
- Later you sell 10,000 EUR/USD at 1.08605.
- Price difference = 0.00100 = 10 pips.
- For EUR/USD, the quote currency is USD, so P/L is naturally in USD:
10,000 * 0.00100 = $10.00(ignoring commissions/fees).
Example (account currency = USD, pair where USD is not the quote currency):
- You trade EUR/GBP and make a profit of 50 GBP (because GBP is the quote currency).
- Your platform converts that GBP profit into USD using a conversion rate (often GBP/USD or USD/GBP) at the time of realization (or continuously for floating P/L).
So, when your account currency differs from the pair’s quote currency, P/L involves an additional conversion step that can slightly vary with the conversion rate.
Common Beginner Misconceptions and How to Verify Quotes/Execution
Misconception: “Forex is centralized, so everyone sees the same price”
In OTC forex, there is no single official consolidated tape. Different brokers aggregate different liquidity sources and apply different markups/commissions. Small quote differences are normal. What matters is whether your broker provides consistent, competitive pricing and reliable execution.
Misconception: “A tight spread always means best execution”
A tight displayed spread does not guarantee low slippage or fast fills. Execution quality depends on liquidity access, routing, internalization rules, and how the broker handles fast markets. Two brokers can show similar spreads but deliver different fill outcomes.
Misconception: “Stop-loss guarantees the exact stop price”
A stop-loss is designed to limit loss, not to guarantee a specific price. In fast moves, the next available liquidity may be worse than your stop level, producing slippage.
How to Verify Live Quotes and Execution Conditions (Practical Checks)
- Compare quotes across sources: open two broker demos side-by-side, or compare your broker’s quote to an independent data feed. Expect small differences; watch behavior during news and overlaps.
- Check the broker’s contract specs: confirm whether pricing is commission-based with raw spreads or spread-only, and note typical/average spreads by session.
- Review execution reports: many platforms show fill price, time, and sometimes slippage statistics. Keep a log of requested vs filled prices during different sessions.
- Test with small size: execution quality can change with order size. Start small and observe whether partial fills or slippage increase as size increases.
- Understand order handling rules: read how the broker treats stop/limit orders, minimum distance to market, re-quotes (if any), and what happens during volatile events.
- Monitor spread behavior by session: record spreads during Asia, London, New York, and overlaps. This helps you choose trading windows that match your strategy’s tolerance for volatility and transaction costs.
