How the Forex Market Works

The interbank market

A handful of global banks account for most forex turnover. They quote each other prices continuously through electronic platforms, and because they compete, their quotes stay tight. That pool of quotes is what people mean by the market price at any moment. There is no single official price; there is a best bid and best ask across the banks that happen to be quoting.

How a price reaches you

Your broker takes quotes from one or more liquidity providers, which may be banks or specialist firms, and builds its own price for you. Depending on the broker's model it may add a mark-up to the spread, charge a commission instead, or take the other side of your trade itself. The price on your screen is therefore the market price as your broker chooses to show it, and two brokers can show slightly different prices at the same instant.

This is not sinister. It is how an over-the-counter market works, and it is why the courses on brokers and on execution spend time on spreads, commissions and order handling: those are where the differences between brokers live.

Why it never closes during the week

Because trading happens wherever banks are open, the market follows the sun. Sydney opens first on Monday morning, Tokyo follows, then London, then New York, and by the time New York closes Sydney is opening again. The only true gap is the weekend, from Friday evening in New York to Monday morning in Sydney, when only very thin trading takes place.

Volume is not evenly spread

• The London session is the busiest, followed by New York.
• The hours when London and New York are both open see the tightest spreads and the largest moves.
• The Asian session is quieter for European and American pairs and busier for the yen, the Australian dollar and the New Zealand dollar.
• Around major news releases, volume and volatility spike for minutes at a time.

Key takeaways

• Prices originate in the interbank market and are passed down through liquidity providers to brokers.
• Your broker's price is the market price as that broker chooses to show it.
• The market runs continuously from Monday in Asia to Friday in New York.
• Volume and spreads vary through the day, and London plus New York is the busiest window.