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Interbank versus retail

Lesson 2 · about 9 min

The FX market is layered. At the top, a small group of banks and non-bank firms trade with each other in sizes of millions. At the bottom, you trade a thousand units through a retail broker. The layers connect, but the price you get and the protections you have depend on which layer you are standing in.

The interbank tier

The largest FX dealers are global banks plus a few electronic market-making firms. They trade with each other through:

  • Primary venues such as EBS and Refinitiv Matching, where the "true" spot rate for major pairs is discovered in minimum sizes of one million units.
  • Direct bilateral lines, where one bank streams prices to another.
  • Prime brokerage, where a big bank lends its credit to a fund so the fund can trade with the whole street.

At this tier, EUR/USD is often quoted with a spread of a tenth of a pip or less. There is no leverage "offered"; participants have credit lines, and the size they can trade is a function of their balance sheet.

You cannot access this tier directly. The minimum ticket is far too large and nobody will extend you a credit line.

The retail tier

Retail FX brokers sit one or two layers below. A broker connects to several liquidity providers (LPs): banks, non-bank market makers, or an aggregator that pools many of them. The broker receives a stream of bids and asks, builds its own quote from the best of them, and shows that quote to you, usually with a markup.

Layer Typical participant Typical minimum size Typical EUR/USD spread
Interbank Global banks, HFT firms 1,000,000 units 0.1 pip or less
Prime of prime Mid-size brokers, funds 100,000 units 0.2 to 0.5 pips
Retail broker You 1,000 units 0.6 to 2 pips (varies)

The spread widens as you move down because each layer adds a margin for the credit risk it takes and the service it provides. A retail broker's spread of one pip on EUR/USD is not a rip-off; it is the cost of a firm standing between you and a market that would not deal with you directly.

What the broker does with your order

There are two things a broker can do when you click buy:

  1. Pass it through to an LP (or aggregate it with other clients' orders and pass the net). The broker earns the markup or a commission and takes little market risk.
  2. Take the other side itself. The broker becomes your counterparty and profits if you lose, loses if you win, unless it hedges.

Most retail brokers do a mix, and this is where the terms "market maker," "ECN" and "STP" come from. The next lesson sorts them out. For now, the important point is that in both cases your legal counterparty is the broker, not a bank. If the broker fails, your open positions and your deposit are claims against the broker.

Key idea: Retail traders do not trade in the interbank market. They trade with a broker that is connected to it. The quote, the fill, the leverage and the safety of your deposit all come from the broker, so the choice of broker is the first trade you make.

Why retail quotes differ from broker to broker

Put the two tiers together and the differences you see between brokers stop being mysterious:

  • Each broker has a different set of LPs, so the raw feed differs.
  • Each applies a different markup, so the spread differs.
  • Each aggregates and updates at a different rate, so the timing of ticks differs.
  • Some skew the quote based on their own inventory when they are taking the other side.

A difference of a fraction of a pip between two brokers at the same moment is the normal result of all this. A persistent difference of several pips, or quotes that move against you only when you have a position open, is not normal and Module 6 covers what to do about it.

The retail trader's actual advantages

It is easy to read the above and conclude the game is rigged. It is a dealer market, and dealers price for their own benefit. But retail size has real advantages that banks do not have:

  • You can trade 1,000 units. A bank cannot make money on a ticket that small, but you can size a position to a risk plan precisely.
  • You have no obligation to quote. A market maker has to show prices all day. You can sit out for a week.
  • Your fills do not move the market. A hedge fund's order does; yours is invisible.

Use them. The rest of the course is about doing so without giving the edge back through costs, leverage or bad brokers.

Try it: Look up your broker's (or a candidate broker's) "execution policy" or "order execution" page. Find one sentence that says whether they act as principal (counterparty) or agent for client orders. If you cannot find it, that is itself information.

Recap

  • The interbank tier trades in million-unit sizes with tiny spreads; retail traders cannot access it directly.
  • A retail broker aggregates liquidity provider quotes, adds a markup, and either passes your order on or takes the other side.
  • In all cases the broker is your counterparty; your deposit is a claim against the broker.
  • Quote differences between brokers come from different LPs, markups and update timing.
  • Small size, no obligation to quote, and invisibility are genuine retail advantages.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Bid-ask spread in an order bookSell orders stacked above buy orders with a gap between the best of each.SELLERS (asks)50.0690050.051,40050.0460050.011,10050.002,30049.99800spread = 0.03BUYERS (bids)
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
How a position size is worked outAccount size, risk per trade and stop distance feed into one box giving the number of shares.ACCOUNT SIZE$25,000your capitalRISK PER TRADE1%of the accountSTOP DISTANCE$0.50entry to stopPOSITION SIZE500 sharesrisk budget: $25,000 × 1% = $250position size: $250 ÷ $0.50 = 500 shares
Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.
Margin and leverageA small deposit controlling a much larger position, and the point at which losses trigger a margin call.Position you controlnotional value $100,000your margin deposit: $5,000$100,000 / $5,000 = 20:1 leverageYour deposit absorbs every dollar of loss$5,000$2,500$0Equity leftMARGIN CALLequity has fallen to $2,5000%1%2%2.5%3%4%5%How far the price moves against you
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.