This mechanism can be easily explained by an example. Market participants know about a planned for a certain time release of important macroeconomic data that will influence the price of a certain Forex instrument. They suppose that the data will be positive and start acting beforehand – buying currency they think will grow. Market participants themselves create an increased demand for a currency, which leads to its growth. In the end it is hard to say what caused the currency price growth – the fundamental factor itself or the actions of the crowd.

I consider mob psychology to be one of the most important elements of price formation in Forex due to the fact that theory is often powerless against the mass of investors that form the main trend. Reasoning from the fact I included a thesis in my theory “Forex Chart is Alive!”: “a trader shall neither go counter to the crowd nor follow it inviolately”. In most cases the ones who can go counter to the crowd and benefit are market-makers and hedge funds while blindly following a trend can lead to trader’s tardy reaction to market signals.

Price formation in the stock market is also influenced by subjective factors: emitter’s rating and reputation, expectations and needs of investors. Here we have the notion of price formation strategy which is used by every emitter. This strategy can be quick profiting, market penetration or covering a particular segment. Different goals pursued by emitters lead to different ways of initial offering price formation.

Price formation in the stock market is easier to analyze, since an exchange of a given country often has specific space boundaries and single trading rules. Due to the fact that Forex is an off-exchange market and has no univocal regulations applicable everywhere in the world there is no benchmark or real price. Every company offering intermediary services in the currency exchange and each trading terminal have their own rules, and accordingly their own prices. It comes as no surprise that a price of any currency provided by different terminals at the same time period can be different.

The majority of transactions in Forex are conducted through ECN trading systems that comprise several banks. Systems of this type are the ones providing information to brokers who in turn provide it to traders. As a result a benchmark price that would be effective for the whole of FX market simply does not exist, since every bank can place their own quotes and ECN can change the quotes to its own favor to receive profit.

Thus, when studying the matter of price formation in the stock and foreign exchange markets you need to remember about the concept of monetary basis of the price, the roles of objective and subjective factors in the price formation of financial market instruments. Moreover, I consider the subjective factors to require a more thorough and all-around analysis, especially in the context of the foreign exchange market.

Konstyantyn  Kondakov