QQ 101, 2 min read
What a market is
After this lesson you can
- Say what sets a price
- Tell an exchange from an over-the-counter market
- Read what one bar of a price chart does and does not record
A market is where people who want to buy something meet people who want to sell it. The price is whatever the last pair of them agreed on. Nobody sets it. It moves because the next buyer or seller is willing to accept something different.
Two ways a market is organised
Exchanges put every order in one place. Shares in Apple trade on an exchange, and so do futures on gold and oil. Everyone sees the same orders and the same last price.
Over the counter (OTC) means you trade directly with a dealer, with no central place. Most foreign exchange works this way. Your broker quotes you a price, and a different broker may quote a slightly different one at the same moment. There is no single official price for EUR/USD.
This matters when you test a strategy. A price history from one dealer is that dealer's quotes. Another dealer's history of the same pair will differ slightly.
Who is on the other side
Every trade has two sides. When you buy, someone sells to you. Often that someone is a market maker, a firm that stands ready to buy and to sell all day and earns the small gap between its two prices. The next lesson covers that gap.
What a price series is
A chart is a record of past agreements. Each bar summarises a period: the first price (open), the highest, the lowest, and the last (close). A bar does not tell you the order things happened inside it, and that limit comes up again when we talk about backtests.
Key points
- A price is the last agreement between a buyer and a seller
- Spot foreign exchange has no single official price
- A bar keeps four prices and loses the path between them
Check your understanding
Why can two brokers show slightly different prices for EUR/USD at the same moment?
What does one bar on a price chart not tell you?
Further reading
- Harris, L. (2003). Trading and Exchanges: Market Microstructure for Practitioners. Oxford University Press. Chapters 1 to 4.
- Bank for International Settlements. Triennial Central Bank Survey of Foreign Exchange and Over-the-counter Derivatives Markets. The standard source on how foreign exchange is traded.