The individuals literally make the Forex market. Without individuals literally there would be no trading opportunity for the retail investor. They extend the credit, handle clearing, back officer operations, and provide an orderly market for investor.
A FX trading dealer combines the roles of a market maker and specialist in the equity market. The primary role of the market maker is to provide liquidity through tradeable prices to the market. The specialist’s role is to intervene in the market when temporary price disparity occurs. Forex market makers provide liquidity and maintain an orderly market. When a retail trader sees a quote on his screen, it is coming directly from the Forex dealer member, and that person functions as the counterparty.
Retail Forex traders don't trade directly in the traditional interbank markets, even though many Forex firms claim their clients do. A trader is dealing in the interbank market if the counterparty is one of the major global financial institutions with trades starting at 1000000. Retail traders, however, have neither the trading volume nor the credit rating to trade on the interbank. That’s what makes them retail forex traders. What the retail trader is trading in is a limited offshoot of the larger interbank market.
In competitive of today retail environment, traders trade on quotes closely mirroring interbank prices provided by their Forex firms. Each Forex firm receives prices from outside providers such as EBS or Reuters or the banks the firm trades with. Most larger Forex firms trade on the interbank market with banks such as Deutsche Bank, HSBC, and JP Morgan.
Each Forex firm has a market maker who reviews the feeds from outside agencies and creates a price to offer to its clients. This is which called Forex market making.
One of the supposed advantages of the Forex market is its liquidity. But perhaps this liquidity is just a mirage—as was recently addressed by some major financial institutions at the FX Week 2004 Congress. First, the Forex retail dealer has no fiduciary or legally binding obligation to provide liquidity and an orderly market in extreme conditions. In fact, most FCMs specifically address this in their account-opening documents. In extreme market conditions, the retail trader is vulnerable because he is dealing with a single counterparty. If the counterparty does not offer the retail trader executable prices, he is stuck. The second reason, which is a major concern for the interbank participants, is that the amount of leverage extended to retail traders soon outpaces actual trading activity. This is not a major concern as long as buyers and sellers are relatively balanced. If they get out of balance, however, there could be a significant liquidity crisis.
In this process some conflicts arise. Because the trader can deal with only one counterparty, he is limited to accepting the price (or not trading) and is subject to the firm’s ability to trade. But the dealer knows the trader’s position and account information, often making it easy to figure out his next trade. This gives the market maker a significant advantage. Strange spike-hitting stop orders can make the trader think. In addition, this mechanism gives the Forex firm’s market makers flexibility in providing quotes.
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