Fundamentally, markets are a mechanism to match buyers and sellers in order to determine the prices of goods and services. Traders interact directly with financial markets, buying and selling in order to manage their deal inventory and change their trading positions.
The process of operating within a financial market is easier to explain using a simple market. Therefore, this chapter uses a market on a single asset, like spot FX or a single equity contract, as the reference. However, the same ideas also apply to more complex markets, including FX derivatives.
The building blocks of financial markets are two types of order:
Bids and offers need to have a size associated with them. Saying, “I will buy apples for 10p each,” is interesting to another market participant but not enough information; will you buy ten apples or a million apples?
There is an important distinction between price makers (also called market makers) and price takers within financial markets. Price makers leave orders in the market. Price takers come into the market and trade on existing orders. If a price taker wants to buy, the contract must be bought at a price maker's offer, and if a price taker wants to sell, the contract must be sold at a price maker's bid. Put another way, the price maker buys at their bid and sells at their ...