Where does Price come from?

I was curious as to how price is set, so I asked a mentor in one of the courses I've paid for (He takes us through live trades daily. I've learned a great deal about Forex this way...just haven't made any money.) how, and who sets the price I see on the screen for a currency.

His answer was..."the banks."

I then asked, the central banks like BOE, BOJ, etc? He said no, it wasn't the central banks, and he didn't know exactly what banks they were.

So, now I'm interested. Who actually determines the price we see on the screen? What Banks are these? And who in the banks are involved in this...or is it all automated somehow? Do they use supply and demand to set the price...or some other factors. And are there rules and regulations controlling who/how/when the prices are set?

Is there somewhere I can go to understand this process more fully?

Well I hope this « forex training course » does not cost you more than $1,- !



Who makes the price of a pair ? easy answer would be the ratio between bid/ask But I’m sure this does not answer your real question.



Forex is not a regulated market like CBOT, NYSE CME or others is is a pear to pear market wher you have what is called MM (market makers) usually big banks but also some pretty big brokers. The exchange billions between then every day via electronic transfer. Therefore ther is NO one price at any given time there is only a range of prices. Your brooker if not a MM uses probably several interbank market data feed from these prices he will compute a price for you.

Do not worry he will try to stick as much as possible to the market average price at any time if not he could expose himself at arbitrations or gaps from traders having differents data feeds .



So to make it short the price you get is your broker price . the real price is the average of the prices of all MM.



By the way the best training is trading with real money !

Well, it's somehow related to supply and demand. Every broker, bank or market maker must have a live data feed of others. Assume that the EUR/USD is at 1.2000/1.2003, and I am a market maker. I received an order from a client to buy EUR/USD at the market right now. Let's assume that this order was to sell $1M and buy Euro Equivalents. I now have 2 choices, I can forward this to the interbank system and take my commission, or I can make the transaction internally, i.e. sell the guy the equivalent Euros from my balances and buy the $1M dollars myself.

Now If there is not too much orders I am receiving, I will immediately reduce the price of the EUR/USD of mine to 1.1996/1.1999 for example and watch the feeds of the other MMs, brokers and banks. I just bought $1M against Euro and want to convert them back with a profit. Now I am leading the market down, while actually it should have been up as the demand on the Euro should be up, but unless there is a stream of orders to buy the EURO against the US Dollar in the whole market, it's no problem.

When I reduce the price, other market makers and brokers will see that I have just reduced my prices, and will eventually reduce their prices as well. Now I will cross convert the $1M EUR/USD position back which I bought from the client and sell it to another market maker or broker at the new price. Now the US dollar is higher than I bought, so I make a profit of 3 or 4 pips plus my spread and then leave the price as it is, untill another order comes to my desk or the prices from other sources on my screen change, so I adapt to them.

In a sense, everyone are followers as long as they are idle, i.e. having no orders.

A bunch of retail traders buying EUR/USD in an thin asian session will experience chain declining prices, and the same if they are short the EUR/USD.

Now, when is this related to supply and demand ?? Only when large orders are executed or masses of traders and non-retail traders enter heavily. In this case, the market makers and the brokers must follow the prices they see on their screen even if they are receiving orders. They will execute the orders and just take the spread, and keep following the prices they see on the other screens without daring to interfere, because they know if they did, if a big bank discovered they are moving prices on the opposite direction, he can simply wipe them out completely, and they will lose huge amounts of money.

Thanks,

Nader

Thank you for giving an answer. interesting discussion to increase knowledge of a problem faced by traders.