Unlike many other financial markets — such as many stock markets around the world — the forex market is not traded on an exchange, but operates as what is known as an over-the-counter market. The difference between exchange-traded and over-the-counter markets is outlined below.
Exchange-traded markets. Exchange-traded markets are one in which all transactions are routed through a central source. In other words, one party is responsible for being the intermediary that connects buyers and sellers. The downside of this is that it gives the intermediary immense power in shaping the market. The upside is that it allows for better enforcement of transactions and security measures; for instance, exchange-traded markets can standardize products, and can ensure that payments and goods are delivered in accordance with the terms of the trade. Stock exchanges like the New York Stock Exchange (NYSE) are an example of an exchange-traded market.
Over-the-counter markets. Unlike exchange-traded markets, over-the-counter (OTC) markets are largely decentralized. There are multiple intermediaries that compete to connect buyers and sellers. The upside of this is that competition to be the intermediary ensures that transaction cost — the cost imposed by the intermediary to execute the trade — is lower. The downside is that the market can be more unregulated, and more prone to intermediaries with dishonest and fraudulent practices. The forex market, as well as many markets for buying and selling debt, are OTC markets.
With the rise of electronic trading and the growth of alternative investing, over-the-counter markets have surpassed exchange-based markets in daily trading volume. Their growth continues to rise.