FX · How the FX market works · lesson 3 of 9 · 5 min read · David Alexander
Where the market lives
The FX market's structure
Foreign exchange has no central exchange and no single official price. It is a network of dealers - banks quoting prices to each other at the core, with funds, companies and retail brokers connected in tiers around them. Every price you see is one participant's quote at one distance from that core, which is why two platforms never show quite the same number.
Ask where shares trade and there is an answer with an address - an exchange, a listed venue, a bell. Ask where EUR/USD trades and there is no building to point at. The price on your screen came from somewhere, and knowing where changes how you read everything the platform shows you.
If there's no exchange, what is there?
A network. At its core, dealing banks quote prices to each other, directly and through electronic dealing venues, in sizes measured in millions. That web of bank-to-bank dealing is the interbank market, and it is where the prices everyone else sees are formed. Nobody administers it; it is what thousands of simultaneous quotes add up to.
Everyone else connects in tiers. Large funds and corporates deal with banks directly. Retail brokers take feeds from a handful of banks and dealing firms, assemble them into one stream, and quote you. Each tier out, the quote passes through another participant who adds their margin. You trade at the edge of the network, and the worked example prices the distance.
Worked example
figures in USDYou trade one standard lot of EUR/USD on a retail platform quoting a 0.9 pip spread. A pip on one lot is worth $10.
- Price the crossing itself: at a spread of 0.9 pips pips on EUR/USD, your 1 lot costs $9 the moment you trade - paid whichever direction you deal, before the price moves at all.
- A bank inside the dealing core crosses the same pair at 0.1 pips: $1. Same instrument, same moment, different room.
- The difference is not a fee anyone hides - it is distance. Your quote passed through more hands than the bank's, and each pair of hands is paid in spread.
Why is there no single official price?
Because there are thousands of prices at once. Every dealer in the network quotes its own bid and ask, moving them independently, second by second. They stay close to each other - anyone quoting far from the pack gets picked off or ignored - but close is not identical. A share has one last-traded price on one venue; EUR/USD has as many prices as there are dealers quoting it.
What this means for you
Two platforms showing slightly different EUR/USD prices at the same second are both working correctly - each shows its own assembled quote, and neither is the official one, because official does not exist here. The spread you pay is the price of your seat's distance from the dealing core, and it is a real, recurring cost the spread tool below will total for you. Where your own broker sits in this picture, and what that means for your fills, is the next lesson's whole subject.
Try it yourself
Spread cost calculator
What a spread costs across a month and a year at your trade frequency and size.
Check your understanding
Question 1 of 4
Where is the FX market?