Grasping the basic principles of supply and demand

Beginner Questions
1

Hello Everybody,

I am completely new at forex trading and just started pre-school. I am struggling with tho following basic concepts.

I do not understand where the supply and demand actually meet eachother. In shares there are orderbooks with bid and ask prices in the market. As a forex trader you only have the actual bid and ask price at that moment in time from your broker without having information about the orderbook (if I understand correctly)

So how do brokers then make their money? In stocks there is commision but in forex there is the bid-ask spread. Does this mean the broker controls the forex prices in his (shop) and can ask and offer what ever he wants?

Could anybody share some light on this because I really want to understand how this works.

Thanks for your help

Michiel

2

Yes, that’s exactly what it means.

Forex is an OTC market with no central exchange. When you trade, you actually trade with your broker as the counterparty and the broker is free to offer you whatever bid/ask price they see fit.

3

Keep in mind that there are also pass-through brokers (ECNs) who do not set prices, just provide what’s available in a given network of liquidity providers. The charge commission.

4

Yes, but even with an ECN you get the quote the bank, in this case the brokers interbank partner, sees fit to offer you.

Until we run our own mega bank, we’ll have to accept trading on the offers that brokers or banks through ECNs will offer us.

So even an ECN is OTC, just one step further away from you, as I understand it.

5

As far as I know (but I’m no expert) the ECNs are passing through prices from multiple sources, not just a single bank. Otherwise, there’s no point for the ECN (remember the N stands for network). You’re just putting a useless added layer (and expense) on things.

6

Yeah, you’re right about that. The point I was trying to make was that since there’s no central exchange in forex, everything is in the end OTC, even with an ECN broker. The only difference is that the OTC quotes we’re offered do not come directly from the broker, but from one or many of the banks in the ECN network, it’s still an OTC price though.

I’m no expert on this either though, but that’s how I understand it to be.

7

As I understood your prior comment, it seemed like you were trying to differentiate OTC from exchange on the basis of the source of the prices. There is no difference, however. There are market makers driving price on exchanges just as there are in OTC markets. It’s just that the exchanges are formalized and cleared and the OTC stuff is more direct counter-party to counter-party.

8

Imagine a bar.

You’re sitting at the counter and the barkeeper pours you a beer and sets it in front of you.
[B]That’s OTC between 2 counterparties.[/B]

You’re sitting on the table and the [B]only[/B] waitress put’s the beer in front of you.
[B]That’s OTC with an exchange involved.[/B]

You’re sitting on the table and there are more than one waitresses around and each of these waitresses could put the beer on your table. You don’t know which one it will be.
[B]That’s OTC with an ECN involved.[/B]

9

So… everything in the end has to do with beer then? (I always suspected that!) :smiley:

Could it even be that a [I]bear[/I] trend is a misspelled [I]beer[/I] trend? Think about it people…

We may be on to something big here!