How does Forex Really work ? the 64000 dollars question

Ok guys here is, in my opinion, a fundamental question: How does Forex work ?
as we all know a pair of currencies go up and down and these moves can happen from one minute to the next, even from one second to the next …

But how does that info get on your nice charts ? well the first part of the answer is obviously: because it is sent on the server to which you are connected. So far so good. But then how does that server get the data ?

A pair, as I understand it, moves up or down depending on the buying and selling of the currency by anyone and everyone across the world, right ? so if the Euro Goes up, it means that more Euros were bought than sold at that exact time right ? But here is the 64000 dollars question (or Euros question if you like):

How is the information accurately gathered second after second ? what computer is strong enough to calculate exchanges across the world second after second ? If this morning I went to my local bank to sell a few Euros and buy a few dollars for whatever reason, (say cause I wanna spend a few weeks in America so I would need dollars in my wallet) the nice lady at the counter takes my Euros and gives me dollars. But how is that information entered into the Forex ? I don’t see her calling someone to tell them that I just bought a few dollars so that the dollar should go a millionth of it’s value up ?

Ok enough, cause my question is becoming quite long :smiley:

My first comment would be that, to be pedantic, a market is not actually driven down by more people selling than buying. This is because there are always as many buyers as sellers, since there has to be someone taking the other side of each trade. However, if participants who are classified into liquidity providers and speculators, the former including any broker who offers quotes, the bias of speculators is what principally drives the direction of the market. In futures markets, there is no clearcut separation into speculators and liquidity providers, as all participants can only enter limit orders at a price, and it is when a buyer and seller agree on the price that a trade takes place. The same is true of the Interbank FX market, but not of the retail market. In a general market (like the global FX market including interbank and retail) the price is driven by buyers becoming willing to accept higher prices, or sellers becoming willing to accept lower prices.

The forex is a decentralised market but the main complication introduced by this is merely that there are participants cannot trade directly with each other. Arbitrage ensures that the separated parts of the market are tied closely together and usually move almost in synch, except at the very smallest level.

It’s my understanding that there IS no central regulatory body for Forex. How could there be, when it’s all international? Basically banks trade among banks, and the price is kept relatively close between them because of the competitive market, similarly to how all gas stations must stay at approximately the same price, yet they can all seem to instantly rise together as if it were one fixed organization. There are SOME main trading places (London, Tokyo, New York), but there is really an infinite number of little ones too.

This entry goes into more detail about it:
Foreign exchange market - Wikipedia, the free encyclopedia

Can I have my $64,000 now :smiley:

yes guys, but that does not answer fundamentaly my question: how does the planetary flurry of exchange get calculated ? by what computer or system ? where ? and how does it find it’s way into charts …

I’m a curious guy :smiley:

If this is the kind of answer you’re looking for, the exchange rates data is sent to our chart’s platform by way of a streaming “feed” from our broker…sorta like in the way RSS is for websites & blogs if you are familiar with that. Now I imagine the broker gets them from somewhere too but thats as far as I’ve gotten so far. Try googling forex feeds or similar and see where it leads :slight_smile:

It occurred to me after I made my last post that my choice of terminology was poor. The two classes of participants are better described as “price makers” (eg brokers) and price takers (eg you and me). It is the trading of the price takers that influences the price makers to change their prices, i.e., if lots of traders are buying in the interbank market, the bid-ask will tend to move up. The influence of retail brokers is mainly just as an intermediary between the individual traders and the interbank market - if some of us buy at our brokers, the brokers will be obliged to hedge via the interbank market, which will have a influence (probably quite small) on the price in that market.

One reason my earlier terminology was not good is that there are very big price takers who are not speculators. For example when a company needs a large amount of foreign exchange, this will require a large transaction in the interbank market. Or when a central bank intervenes to move a currency, they will do the same.

So, the answer to the question of how the price gets calculated is really that that is how the price makers react to the actions of price takers.

To continue along on Elroch’s second post, which has it right (I was going to have to correct the first one :wink: ) and bring in Quexos questions about retail currency exchange, the latter is not at all part of the pricing mechanism we traders see playing out. It’s much, much too small.

Think about it. Roughly $3 trillion a day is done in forex trading. How much direct hand-to-hand (so to speak) currency exchange is done? A tiny, tiny fraction.

There is no one central source for exchange rates. Rather the price makers will watch and stay in line with each other. Think of a trading pit with lots of market makers. While what each market maker will, at times, show little variations from where the general quoting is at, it tends to be short-lived because failure to stay in line will mean either no one trading with them or their position book getting over-balanced on one side.

Dear tetorii,

Thank you for your email.

We have some of the world’s largest liquidity providers that send us live rates. We use the sum of these rates to create our own rate feed which we then transmit to our clients’ trading platforms.

If you have any other questions please email us again or call 1-877-FOREXGO. You can also go to the following link for a list of International Toll Free Numbers.

thats what’s reply to your question XD hope that helps a bit

:slight_smile: I thought that was spam posted by a broker for a minute, but it is a useful contribution.

The small differences between the prices (and the offset between the prices) of different brokers indicate that either their liquidity providers are not quite in line with each other or some of them use more sophisticated algorithms based on their own customers trades to tweak the prices based on the prices offered to them by the banks. Probably both are true.

Do we need to know?

It doesn’t hurt to understand it since the structure of a market defines how prices move.