ECN – looks like a fair game, but is it?

When I speak about the structure of OTC markets, especially the fact that prices in them are offered by just select market participants and can vary significantly for different buy-side clients, many traders say, “This is not fair! Why won’t FX work in the same manner as other regulated markets with centralized exchanges where anyone can improve the price?”

There is no single and simple answer to this question.

First, the FX market trades money for money and not any asset for money. Its original purpose was to facilitate currency exchange rather than speculative trading with various financial instruments. And (fortunately!) we don’t have to go to an exchange to just get some British pounds for euros or Indian rupees for US dollars. Therefore, OTC trades are quite natural for this purpose and a currency exchange shop is an excellent example of trading OTC.

Second, the FX market consists of multiple...