How the Forex Market Works: Where Your Price Comes From, Last Look, Slippage

A stock market has an exchange at its centre: every order goes into the same order book. The Forex market has no centre. The price on your MT5 is your broker’s price, passed down through several layers of price makers. Once you understand that structure, you can explain why the spread widens at 4 a.m. Thai time, why a Stop loss closes worse than you set it, and why big orders move price. This article explains the mechanics; it doesn’t recommend any broker or account type.

Forex is OTC: there is no central exchange

OTC (over-the-counter) means trading directly between two parties instead of through an exchange. Bank A quotes EUR/USD to its own clients, Bank B quotes its own. The two prices are usually very close, because if they drift too far apart someone immediately buys from the cheaper one and sells to the dearer one. But no price is the “official” price of the whole market.

So each broker’s chart is slightly different, and the High and Low of the same candle don’t match exactly. Volume on MT5 for most pairs is tick volume, how many times that broker’s price changed, because nobody sees market-wide volume. And the depth of market some platforms show is the book of that one broker or venue only.

Most spot FX deals settle two business days later (T+2), so a broker offering FX as CFDs has to roll positions forward every day. That is where swap comes from; see What is swap.

How big is it: figures from the BIS

The market-size figures people quote come from the BIS Triennial Central Bank Survey by the Bank for International Settlements, which collects data through dozens of central banks every three years, in April.

The 2022 edition reported average turnover of about 7.5 trillion dollars a day, with the US dollar on one side of about 88% of all trades. What many people don’t know is that spot, the kind retail traders know, is only a minority of that figure. Most of it is FX swaps, which banks and companies use to manage cash across currencies. The largest trading centre is London, followed by New York. The latest edition’s figures are on the BIS website.

A large market isn’t equally deep at every hour or in every pair: liquidity concentrates in the majors while London and New York are open.

The tiers of the market

The interbank market is a small group of major banks that handle a large share of trading. A liquidity provider (LP) is anyone who streams buy and sell prices all the time: banks, and non-bank market makers running automated systems. A prime broker lends its credit so smaller firms can reach those prices. Funds, companies and central banks come in at various tiers through banks or prime brokers.

Where your quote comes from

The Bid/Ask in MT5 is the price at which your broker is willing to trade with you. It is built from the prices the broker receives, plus a margin set by its policy, and it may filter out abnormal price spikes. Each LP’s price comes with a size, for example Ask 1.08502 for 1 lot. If you need more than that, you have to take the next price.

That is why the spread isn’t fixed. When many LPs stream tight prices, the best Bid and Ask sit close together. When LPs pull or widen their prices, the spread you see widens too. The spread basics are in What spread costs per trade.

Execution models: market maker vs STP/ECN

Model	Who is your counterparty	Broker’s main income	What to check
Market maker (dealing desk)	The broker itself	Spread, and the result of unhedged positions	Conflict of interest, requote and slippage policy
STP	The LP the broker passes your order to	Markup in the spread, or commission	How many LPs, how prices are chosen
ECN-style	Participants on the matching venue	Commission per lot	Raw spread plus commission, visible depth

A market maker takes the other side of your order itself. One client’s buy can often be offset against another client’s sell inside the broker (internalisation); the rest the broker can keep or hedge with an LP. The catch is a conflict of interest: if the broker holds the other side, a client’s loss is the broker’s gain. Licensed brokers must have a policy for managing that.

STP (straight-through processing) forwards your order to one or more LPs; the broker earns a markup or a commission. ECN-style sends orders to a venue where several participants post competing prices. You usually see a very tight raw spread but pay a separate commission.

In practice many brokers run a hybrid: some client flow is passed on, some is kept. So the account name tells you less than you’d think. The document to read is the broker’s order execution policy, and check its licence with the financial regulator of the country where it is registered. More warning signs in Forex scam red flags.

What is last look

Last look is a short window in which an LP that has received a trade request at the price it quoted gets to check it before accepting or rejecting. It is usually measured in milliseconds.

Why it exists: an LP streams prices to many clients at once. If the market moves and the LP’s price hasn’t updated yet, a faster participant can buy at the old price, which is now cheaper than the real one. Last look is the LP’s protection against that risk.

The effect on you: rejections tend to happen when the market has moved in your favour. When it has moved against you, the LP usually accepts. So the effect is asymmetric. The FX Global Code, the good-practice principles written jointly by central banks and market participants, has a principle on last look: use it only as a risk control, and disclose how it is used. Retail traders rarely see last look directly; they see slower fills, requotes or a new price.

Requotes and slippage

In MT5 the broker sets the execution mode. The two you meet most often:

• Instant execution: you ask for the price you see. If price moves beyond the accepted range (deviation), the broker sends a requote with a new price, which you can accept or refuse
• Market execution: no requotes. The order gets the next price actually available, and the difference from the price you saw when you clicked is slippage

Slippage goes both ways. If price moves in your favour while the order travels, that is positive slippage, a better price than you asked for. If it moves against you, it is negative slippage. A fair system passes on both. If your log shows only negative slippage over hundreds of trades, ask the broker and reread the policy.

A normal Stop loss becomes a market order once it is touched, so it can slip too. Each order type is explained in Order types explained.

Why liquidity thins at rollover and around news

Rollover: the market starts a new day at 17:00 New York time, which is 04:00 Thai time (UTC+7) during US daylight saving time and 05:00 in winter. The settlement date moves forward a day, banks run their end-of-day processes, and New York has closed while Asia isn’t fully open yet. Many LPs stop quoting or widen their prices for a few minutes, so the spread can be several times wider than usual. A tight Stop loss can be hit by the spread widening alone, while the mid price barely moves. Session times are in Forex market hours in Thai time.

Before big news: LPs don’t want to hold prices that could be wrong the instant the figure comes out, so they pull or shrink their quotes before the release. When the news hits, price jumps across several levels. Orders that trigger when price moves through a level, including Stop losses, get the first price actually available, which can be far from where they were set. How to prepare is in How to read the economic calendar.

Market depth: why big orders move price

The best price comes with a limited size. An order bigger than that has to walk the book, taking the next level and the next, so the average price ends up worse than the first price you saw. Here is an illustrative example: a Buy order for 4 lots of EUR/USD (1 lot = 100,000 EUR) in two different Ask-side books.

Normal market: Ask 1.08502 has 1.0 lot, 1.08503 has 1.5 lots, 1.08505 has 2.0 lots, 1.08508 has 3.0 lots

1. Fill 1.0 lot at 1.08502, 3.0 still needed
2. Fill 1.5 lots at 1.08503, 1.5 still needed
3. Fill 1.5 lots at 1.08505, the 4 lots are complete
4. Average price = (1.0 × 1.08502 + 1.5 × 1.08503 + 1.5 × 1.08505) ÷ 4 = 4.34014 ÷ 4 = 1.085035
5. Worse than the best Ask by 1.085035 − 1.08502 = 0.000015 = 0.15 pip
6. On EUR/USD a 1-pip move on 1 lot = 10 USD, so 4 lots = 40 USD per pip. Extra cost = 0.15 × 40 = 6 USD

Before big news: LPs have pulled quotes, leaving 1.08502 with 0.3 lot, 1.08506 with 0.5, 1.08512 with 1.0, 1.08520 with 2.0, 1.08530 with 3.0

1. Fill 0.3 + 0.5 + 1.0 + 2.0 = 3.8 lots from the first four levels, and the last 0.2 lot at 1.08530
2. Total = 0.325506 + 0.54253 + 1.08512 + 2.1704 + 0.21706 = 4.340616
3. Average price = 4.340616 ÷ 4 = 1.085154
4. Worse than the best Ask by 0.000134 = 1.34 pips = 1.34 × 40 = 53.60 USD

Check: a small 0.5-lot order fills entirely at 1.08502 in the normal book, with no slippage at all. In the thin book even 0.5 lot has to take two levels, averaging 1.085036, 0.16 pip worse.

The first price you see is only good for the size sitting there. The thinner the market, the deeper the same order has to walk.

The sizes in this example are several times larger than a typical retail trade. In a normal market your 0.1-lot order barely touches an LP’s prices. But the same mechanism reaches you indirectly. When many traders’ Stop losses sit at the same level, for example just below a round number, touching it turns all of them into market orders at once, and together they eat several levels of the book. More in Round numbers and stop clustering.

Using this in your risk management

• Budget for slippage: size the trade from your Stop loss distance, then ask whether you could live with a close twice as bad as planned. Try it in the position size calculator
• Avoid market orders in thin periods: around the rollover and for a few minutes either side of big news. If the entry price matters, a Limit order won’t fill worse than you set, but it may not fill at all
• Small targets suffer most: 0.15 pip of slippage means nothing against a 50-pip target but eats most of a 2-pip target. See Spread on small timeframes
• Measure it yourself: log the requested and filled price on every trade, split by time of day, and you will see whether your broker passes slippage on both ways. A sample logging table is in Running an EA on a VPS

Execution quality is measured from hundreds of real fills, not from an account name or an advert.

Common mistakes

• Assuming there is one market price and blaming the broker every time a chart High differs slightly from elsewhere. Small differences are normal in an OTC market. What deserves suspicion is fills that are worse systematically and in one direction only
• Believing ECN means no conflict of interest. The account name is not evidence; read the execution policy and check the licence
• Hitting a market order as the news figure comes out, or holding a tight Stop loss through the rollover. The price you saw may no longer exist when the order arrives
• Watching the spread but not the slippage. An account with a tight spread but steady negative slippage can cost more than one with a slightly wider spread
• Reading tick volume as real traded volume. It counts how often that broker’s price changed, not the volume of the whole Forex market