Foreign Exchange Market Structure and Participants
The shape of the market
The foreign exchange market is an over-the-counter, decentralised, largely bilateral market that trades continuously across time zones. Candidates must know the participant taxonomy: central banks and treasuries, commercial and investment banks (dealers), non-bank market makers, corporate hedgers, institutional investors and asset managers, retail brokers, and brokers/interdealer platforms. Distinguish the sell side (dealers quoting two-way prices and warehousing risk) from the buy side (price takers with commercial or investment motives).
Trading venues and tiers
The market operates in tiers. The interdealer market is where dealers manage inventory, historically voice-brokered and now dominated by electronic matching and prime-brokerage credit relationships. The customer market links dealers to corporates and funds. Understand the role of ECNs, last look, credit limits, and the shift from voice to algorithmic execution. Know why the FX Global Code exists: it is a voluntary, principles-based standard covering execution, transparency, information handling, and confirmation/settlement, not a statute.
Traps in questions
Common traps: treating the FX Global Code as legally binding; confusing a broker (agency, no principal risk) with a dealer (principal, holds risk); assuming a central bank trades only for profit rather than policy; and forgetting that non-deliverable markets and restricted currencies have different participant structures. Also watch for questions implying a single central exchange or a consolidated tape - neither exists in FX.
Rule of thumb
Classify every participant by two questions: does it take principal risk, and is it trading for its own account or a client's? A dealer answers yes/own; a broker answers no/client; a corporate answers yes but for commercial hedging, not market-making.
Worked example
A corporate treasurer asks three banks for EUR/USD quotes and executes with the tightest. The banks are dealers acting as principals; the treasurer is on the buy side with a commercial motive. No exchange, clearinghouse, or broker is involved in the execution itself.