Spot Forex Market Structure

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The spot forex market has always been a decentralised global network of buyers and sellers - meaning there is no physical central exchange that acts as a central clearing party. This is unlike, say, stocks or futures which traded through the exchanges such the London Stock Exchange or Chicago Mercantile Exchange.

Trading of currencies is done OTC (over-the-counter), in the sense that currency buyers and sellers from all over the world make a binding contract with each other after agreeing on a price - and this is not carried out through an exchange. This aspect of spot forex trading is different from forex futures trading which is carried out through an exchange. Forex traders carry out their activities by dealing directly with one another or through brokers via telephone and internet connections.


In early 2007, the Chicago Mercantile Exchange (CME) and Reuters launched the world's first centrally cleared global forex market place called FXMarketSpace.

There are several benefits of a central exchange, for example:

• counterparty risk for trades is reduced, and

• there is trading anonymity - something very much coveted, especially for big players.

In this centrally cleared system, the CME will act as the central counterparty and guarantee the performance of all contracts for both buyers and sellers. Unfortunately, FXMarketSpace is an institutional trading platform and is not open to retail market players. According to the website (, market participants would have to meet the FSA (Financial Services Authority is based in the United Kingdom) definition of a "Market Counterparty", and individuals would have to be sophisticated investors, typically with a net worth over $20 million. Therefore, as a central exchange for forex retail players is still not a reality, I shall focus on the OTC structure of the forex market in this chapter.

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