Forex Decentralized Market – Chapter 4 | Learn Forex

The term decentralized means something which does not get controlled from a central organization. Or a department that moves away from a central location to other location and operates independently. The benefit of a decentralized system is, it reduces workloads from the main center.

The financial market has two categories in terms of its organizational structures, centralized and decentralized as explained below:

Centralized market:

One organization controls the whole market. Mostly the stock markets which get operated with in the home country.

Suppose the Indian stock market, it gets operated by the law of Indian jurisdictions (SEBI). If you buy a share from NSE (National stock exchange) then that share price gets distributed from NSE only. The same goes for Google shares (GOOGL) NASDAQ transactions get operated by NASDAQ (National association of securities dealers automated quotations) in the United States.


NOTE:

Sometimes same stock gets operated from multiple centralized markets like Microsoft stock is registered with NASDAQ also registred with London stock exchange. Both NASDAQ & LSE quotes Microsoft stocks differently.

Decentralized market:

The forex market is huge and operated globally with all banks and its transactions, therefore decentralization across all countries is almost not possible. That’s why each financial body operates the same currency and its conversion to the other currency independently with their spreads and commissions.

Thus is no head of this market & no control over what price quotation. Therefore it is riskier than stock markets but highly liquid, major currencies are any time available to buy and sell for 24 hours.

Risk involves in the decentralized market:

Just because the forex market has no central control over its price, sometimes during any black swan event currency price can change drastically. Also, different banks or liquidity providers can manipulate market pricing according to their needs.

For example, during the Swiss National Bank (SNB), Swiss franc flooring decision(2011) market moved 1000 pips in 1 minute, because SNB wants to set a rate for a swiss franc. Some traders made the fortune of out it, some exactly the opposite. Generally, during any big event placing a trade is not a much safer option.

Forex quote difference:

Each forex broker has different liquidity providers. Therefore, forex currency quotation varies broker to broker at least 3-5 pips or points. The reason for this is, not just using different liquidity providers but also the spreads operated by the broker or from the bank side. (learn more from chapter 7)

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