Centralization – Forex Academy

Introduction

It is a known fact that the forex market is the market for trading currencies, and the stock market is for trading shares of a company. This being the major difference between the two, there is another significant difference you must know. The stock market is fully centralized, while the forex market is decentralized. In this lesson, let us discuss how different a decentralized market is to a centralized one. Apart from that, let us also understand the structure of the forex market.

The Centralized Market

In a centralized market (stock market), there exists an intermediary between the buyer and seller to trade in the market. There is an entity called the central exchange, which facilitates the transactions between the two parties. In the present day, ECNs on stock markets have brought this to an end as they connect both the parties directly, which ensures the bid and ask prices are unified. Also, the competition between ECNs and direct traders tighten spreads and increments the available volume, making harder the manipulation of the prices.

The Decentralized Market

In a decentralized market, there is no concept of centralized exchanges. With the absence of a central intermediary, there is direct trading between buyers and sellers among top institutions. However, by default, retail traders will have to approach a broker to facilitate their transactions. Depending on the liquidity provider, the quotes of the currencies typically vary from broker to broker. That makes accounts open on non-ECN brokers suitable for price and spread manipulation. There is a possibility that a retail trader won’t be guaranteed the real bid and ask prices in the market. However, though there is manipulation, the volume of traders in the forex market is much higher when compared to the stock market. This could be due to the fact that the leverage in the forex market is considerably higher than the stock market.

Hierarchy of the forex market

Banks and retail traders are not the only ones who contribute to the Forex Market. In fact, there is a linear organization in the contributors to the forex. The hierarchy for the same is given below based on their significance in the market.

Major Banks ( Central banks + Top Commercial Banks)
Electronic broking services (EBS) | Reuters dealing
Medium-sized banks and small-sized banks
Hedge funds and commercial companies | retail ECNs
Retail traders

From the above hierarchy, it is clear that the major banks are the largest contributors in the market. Major Banks consist of the largest banks around the world. The uniqueness of the major banks is that they trade directly with each other or via the EBSs or the Reuters dealing. Hence, it is also referred to as the interbank market. And this interbank market includes the medium-sized banks as well as the small-sized banks.

Next up in the line come the hedge funds, commercial companies, and retail ECNs. These sets of traders don’t make the transactions with the interbank market, but, instead, they get it done via commercial banks. Typically, the quotes offered here are much higher than that of the interbank market.

Finally, last up in the line stand the retail traders. Retail traders are the ones who place their trades via forex brokers. The number of traders in this hierarchy is extremely high. However, when it comes to the volume they trade, it is significantly lesser when compared to banks and hedge funds. Back in the day, it was not possible for small retail traders to enter the market. But, nowadays, anyone can trade the Forex market by depositing as low as $100 into their account.

Hence, this completes the lesson on the forex market hierarchy. In the following lesson, we shall take this topic forward by as we’ll be covering the different types of players in the forex market in detail.

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Introduction

Cryptocurrencies have made an impact on the world’s financial system in an unprecedented way. The speed and agility of global transactions have changed with the advent of cryptos. At present, there are around 3053 cryptocurrencies trading across the world, with a market cap of more than $246 billion. Many global companies around the globe have started to accept cryptos as a mode of payment for the products and services they provide. Bitcoin atm’s and debit cards are making the widespread adoption of cryptocurrencies easy and worthwhile. In this article, let us understand the reason for this wide adoption of these cryptos by looking at some of the problems they solve.

🏳️ Centralization: Cryptocurrencies are built on blockchain platforms enabling them to adopt all the features of the blockchain technology. The fiat currency we use today is minted by the central banks of the respective countries. The presence of a central entity to control something is called centralization. Banks play a significant role in the financial status of any country. It is well known that the financial crisis of 2008 is due to the banking crisis. That was the time when Bitcoin came into the picture, paving the way for the decentralized currency. Cryptocurrencies are decentralized with no third-party control. They run on blockchain technology as per the network setup initially. The network is maintained and run by different entities mining the native currency. Thus by no one controlling the money, they remain unique and stable. This is the prominent problem that cryptocurrencies solve over fiat currency.

🏳️ Intermediary costs: The transaction costs to send money between different countries is too high. The respective entities charge a certain percentage of the transaction amount, and it depends on the amount we send and the service we utilize. Also, it takes more time to settle transactions across different countries. There is no limit for cryptocurrency transfer across the world. It is instantaneous with a minimal amount as a transaction fee when compared with the standard bank wire transfers.

🏳️ Privacy: The transactions you make in cryptos are semi-anonymous; some cryptos even ensure complete anonymity. Each of the users will have their crypto addresses, which are used to make transactions. These addresses ensure privacy while transacting cryptos. Having said that, the level of privacy varies from one crypto to others.

🏳️ Security: Blockchain assures the utmost protection when it comes to cryptocurrency transactions. The transactions in the blockchain cannot be reversed; once committed, they are committed for a lifetime. The cryptographic techniques used to secure the transactions are almost impossible to hack.

🏳️ Inflation: Any cryptocurrency has a limit of coins that it can ever have or in some coins, the number of coins that can be mined per year will be capped. In the case of fiat currency, the government can issue bonds and manipulate interest rates to increase the circulating money, thus decreasing its value leading to inflation. Since the number of coins that ever will be available is capped in the case of crypto, inflation can be effectively handled.

These are only a few problems that cryptocurrencies can solve, but with the widespread usage, there would be solutions for problems that we don’t even see now. We hope you find this article informative. Cheers!