Brokers facilitate Forex trading through their platforms and allow traders to quickly make their trades on the market. The prices you see quoted on your screens every day come from one principle source. However, they arrive in front of us in very different ways. But how do they actually operate?

How Do Forex Brokers Work?

In order to understand how brokers operate and where they get their quotes from, we need to look at it from a wider perspective. The dynamic here is similar to that of any market that consists of buyers and sellers. Traders (the clients) pay sellers (the brokers) a fee (the bid/ask spread) to gain access to the Forex market.
In this equation, brokers are actually retailers who provide the service by being connected to liquidity providers. These brokers who are also known as ‘white label’ for the larger brokerage firms, in effect add a further layer to the prices quoted, with all that this entails, removing the trader still further from the actual price action in the interbank pool.

Who Are the Major Forex Liquidity Providers?

The interbank liquidity pool is dominated by the following large banks, who between them control about 80% of the foreign exchange market:

  • Deutsche Bank - 20 % forex market share

  • UBS - 12% forex market share

  • Citigroup - 11% forex market share

  • Barclay’s Capital - 7% forex market share

  • RBS - 7% forex market share

  • Goldman Sachs - 5% forex market share

  • HSBC - 5% forex market share

  • Bank of America - 4% forex market share

  • JP Morgan Chase - 4% forex market share

  • Merrill Lynch - 4% forex market share

The broker will receive real-time streamed quotes from the liquidity providers by connecting them to the interbank market through a bridge interface. This allows brokers to receive the constant flow of quotation that they use to "resell" to individual traders.
Larger brokers usually connect with more than one liquidity provider, this allows them to be flexible when executing orders, and also offer better prices. Meanwhile, small Forex brokers might have only one or two liquidity providers, which could narrow their options in certain situations.

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