Your spread is a tax on ignorance. When you pay 2 pips to enter EUR/USD, the Interbank Market is paying 0.1 pips. That 1.9-pip difference? Your broker's markup for connecting you to Tier 1 Liquidity Providers. Understanding the Interbank structure isn't academic—it's profit optimization.
Welcome to Lesson 4
You learned the Forex hierarchy: Tier 1 (Interbank), Tier 2 (Dealers), Tier 3 (Retail). But here's what beginners don't understand:
Where does your broker's price ACTUALLY come from? And why does it matter?
The Professional Difference: Retail traders choose brokers based on "lowest spread" advertising. Professionals choose based on Liquidity Provider depth and execution model transparency. They ask: (1) How many Tier 1 LPs does the broker aggregate? (2) Is it Market Maker (conflict of interest) or ECN (no conflict)? (3) What's the TOTAL cost (spread + commission)? Understanding Interbank structure = choosing the RIGHT broker, not the CHEAPEST.
Lesson Chapters
1Chapter 1: Defining the Interbank Market⏱️ ~3 min
The Interbank Market is the apex of Forex—the exclusive wholesale network where the world's largest banks trade currency directly with each other.
What is the Interbank Market?
Definition: A decentralized global network where Tier 1 commercial banks trade currency peer-to-peer in massive volumes
Not a Physical Location:
- No trading floor (like NYSE)
- Electronic network (via Reuters, EBS, Bloomberg terminals)
- 24/5 operation
Who Participates:
- J.P. Morgan Chase
- Citibank
- Deutsche Bank
- UBS
- Goldman Sachs
- HSBC
- Barclays
Defining Characteristics
1. Wholesale Volume (Massive Size)
Typical Trade Sizes:
- Minimum: $10 million
- Average: $100 million - $500 million
- Large: $1 billion+
2. Best Pricing (Tightest Spreads)
Interbank Spreads:
| Pair | Interbank Spread | Retail Spread | Difference |
|---|---|---|---|
| EUR/USD | 0.1 pips | 0.8-2.0 pips | 8-20x higher |
| GBP/USD | 0.2 pips | 1.0-2.5 pips | 5-12x higher |
Why So Tight:
- Massive volume (competition)
- No markup (peer-to-peer)
- Credit relationships (trusted counterparties)
3. Credit Relationships (Access Based on Trust)
Why Retail Can't Access:
- ❌ No Tier 1 credit rating
- ❌ Insufficient capital ($10M+ minimum trade)
- ❌ No interbank relationships
2Chapter 2: The Concept of Liquidity⏱️ ~3 min
Liquidity is the lifeblood of Forex—the single most important feature determining your trading experience.
What is Liquidity?
Definition: The ease with which an asset can be bought or sold without significantly affecting its price
High Liquidity vs. Low Liquidity
| Feature | High Liquidity | Low Liquidity |
|---|---|---|
| Spreads | Tight (0.5-1.0 pips) | Wide (3-10+ pips) |
| Slippage | Minimal (fill at requested price) | High (fill 5-10 pips worse) |
| Execution | Instant (milliseconds) | Delayed (seconds, or rejection) |
| Cost | Low ($5-$10 per Standard Lot) | High ($30-$100+ per Standard Lot) |
Real-World Liquidity Examples
Example 1: EUR/USD During London/NY Overlap (High Liquidity)
Conditions:
- Time: 9 AM EST (both hubs active)
- EUR/USD spread: 0.6 pips
- Order: Sell 10.00 Standard Lots ($1 million)
Execution:
- Fill time: Instant (20ms)
- Fill price: 1.08500 (exactly as requested)
- Slippage: 0 pips
- Cost: 0.6 pips × $10/pip × 10 lots = $60
Example 2: EUR/USD During Asian Session (Low Liquidity)
Conditions:
- Time: 11 PM EST (Asian dead zone)
- EUR/USD spread: 2.5 pips
- Order: Sell 10.00 Standard Lots
Execution:
- Fill time: 300ms (delayed)
- Fill price: 1.08485 (1.5 pips slippage)
- Cost: 2.5-pip spread + 1.5-pip slippage = $400
Same trade, 6.6x cost difference due to liquidity!
Professional Liquidity Rule: Never trade when spread is more than 20% of your target. Scalping for 10 pips with 3-pip spread = 30% cost (unviable). Swing trading for 200 pips with 3-pip spread = 1.5% cost (acceptable). Liquidity optimization can improve profitability by 30%+ without changing strategy.
3Chapter 3: Liquidity Providers⏱️ ~3 min
Liquidity Providers (LPs) are the Tier 1 institutions that GUARANTEE liquidity exists by continuously quoting buy/sell prices.
Who Are Liquidity Providers?
Primary LPs (Tier 1 Banks):
- J.P. Morgan Chase (largest FX dealer globally)
- Citibank
- Deutsche Bank
- UBS
- Goldman Sachs
- HSBC
Market Share:
- Top 5 LPs: ~50% of global Forex volume
- Top 10 LPs: ~75% of global Forex volume
What Do Liquidity Providers Do?
1. Continuous Quoting (24/5)
LP (J.P. Morgan) quotes EUR/USD:
- Bid: 1.08500 (willing to BUY at this price)
- Ask: 1.08502 (willing to SELL at this price)
- Spread: 0.2 pips
This quote is ALWAYS available (24/5)
2. Order Matching (Facilitating Trades)
Scenario: Hedge Fund wants to sell $500M EUR/USD
Step 1: Hedge Fund contacts LP (Citibank)
Step 2: Citi finds buyers (other banks, funds)
Step 3: Citi matches $500M sell with $500M buy
Step 4: Trade executed, both sides filled
3. Risk Absorption (Taking Opposite Side)
When no immediate match exists, LPs hold the position temporarily and manage the risk.
How LPs Profit
Revenue Sources:
1. Spread Income:
- Buy at Bid: 1.08500
- Sell at Ask: 1.08502
- Profit: 0.2 pips per $100M = $20,000
2. Volume (High Turnover):
- Execute $50 billion daily
- 0.1-pip average spread
- Daily profit: $5 million+
4Chapter 4: Market Makers vs ECN⏱️ ~4 min
Retail brokers use two models to connect you to Interbank liquidity. Your choice dramatically impacts costs and execution.
Model 1: Market Maker (Dealing Desk) 🎰
How It Works:
Broker = Your Counterparty
- You buy EUR/USD → Broker sells to you
- You sell EUR/USD → Broker buys from you
Characteristics:
| Feature | Market Maker |
|---|---|
| Pricing | Fixed or wider spreads (2-3 pips typical) |
| Commission | Usually $0 (profit from spread) |
| Conflict of Interest | HIGH (broker wins when you lose) |
| Execution | Instant (broker is counterparty) |
Pros:
- ✅ Simple (one spread, no commission)
- ✅ Instant execution (usually)
- ✅ Good for beginners
Cons:
- ❌ Conflict of interest (broker bets against you)
- ❌ Wider spreads (2-3 pips vs. 0.8 pips ECN)
- ❌ Requotes during wins
Model 2: ECN/STP (No Dealing Desk) 📡
How It Works:
Broker = Intermediary (Router)
- You place order → Broker routes to LP pool
- LPs compete → Best price selected
- Order filled at best available Interbank price
ECN Structure:
Your Order: Buy EUR/USD
↓
Broker's ECN Aggregator
↓
LP 1 (Citi): 1.08505 Ask
LP 2 (JPM): 1.08502 Ask ← Best price
LP 3 (UBS): 1.08507 Ask
↓
Order filled at 1.08502 (JPM's quote)
Broker adds commission ($6 per lot)
Characteristics:
| Feature | ECN/STP |
|---|---|
| Pricing | Variable spreads (0.5-1.5 pips typical) |
| Commission | YES ($3-$7 per Standard Lot) |
| Conflict of Interest | LOW (broker profits from volume) |
| Execution | Ultra-fast (direct to Interbank) |
Pros:
- ✅ No conflict (broker doesn't trade against you)
- ✅ Tightest spreads (0.5-0.8 pips during peak)
- ✅ Honest execution (no games)
Cons:
- ❌ Commission charged ($6-$7 per lot)
- ❌ Variable spreads (widen during news)
- ❌ More complex
Total Cost Comparison
Scenario: 1.00 Standard Lot EUR/USD Trade
Market Maker:
- Spread: 2.5 pips = $25
- Commission: $0
- Total Cost: $25
ECN:
- Spread: 0.6 pips = $6
- Commission: $6
- Total Cost: $12
Winner: ECN saves $13 per trade
Over 100 Trades:
- Market Maker: $2,500 total cost
- ECN: $1,200 total cost
- Savings: $1,300 (52% lower cost)
5Chapter 5: Summary, FAQs & Quiz⏱️ ~4 min
Summary
Key Principles (0/3)
Broker Models:
Market Maker:
- Counterparty to your trades (conflict of interest)
- Wider spreads (2-3 pips), no commission
- Good for: Beginners, swing traders
ECN/STP:
- Routes to LP pool (no conflict)
- Tight spreads (0.5-1.5 pips) + commission
- Good for: Scalpers, day traders, professionals
Frequently Asked Questions
Q1: Can retail traders become Liquidity Providers?
No—absolutely impossible for retail traders.
Requirements to be an LP:
- ✅ Tier 1 bank status (creditworthiness rating)
- ✅ Billions in capital ($10B+ typical)
- ✅ Interbank credit lines
- ✅ Risk management infrastructure
Q2: Why do Market Makers sometimes offer zero-spread accounts?
It's marketing, not generosity—there's ALWAYS a cost.
Three "Zero Spread" Models:
- Hidden commission ($10 per lot)
- Markup on other costs
- Bet against you (MM profits from your losses)
Professional Reality: "Zero spread" = cost hidden elsewhere. Always calculate TOTAL cost (spread + commission).
Quiz
Which institution guarantees the market's high liquidity by continuously quoting both buy and sell prices for currency pairs?
Which execution model has a LOW conflict of interest because the broker routes the order externally?
In the forex market, the term 'slippage' is most likely to occur under conditions of:
Why can retail traders NOT access the Interbank Market directly?
What is the PRIMARY way brokers with ECN/STP models make money?
Call to Action
Understanding your broker's connection to Interbank liquidity is CRITICAL for professional trading.
Compare Broker Execution Models
Open demo accounts with both Market Maker and ECN brokers. Execute identical trades and compare total cost, execution speed, slippage during news, and requote frequency. See which model optimizes YOUR strategy.
Deriv
- ✅Zero-spread accounts for tighter entries
- ✅Swap-free (Islamic) available
XM
- ✅Consistently low spreads on majors
- ✅Micro accounts — start with a smaller risk
- ✅Swap-free (Islamic) available
- ✅No trading commission
🚀 Ready to experience ECN liquidity? Use our exclusive link to open a demo account with a multi-LP ECN broker!
Proceed to Lesson 5: Forex Market Sessions & Trading Hours
Prerequisites
Before studying this lesson, ensure you've completed:
Ready to understand Interbank liquidity? Knowing how LPs work helps you choose the right broker and optimize trading costs.
Ready to continue?
Mark this lesson as complete to track your progress.