These big banks make an exclusive club where most trading activities take place. This club is known as the Interbank Market. The worlds big banks are the main players in the spot forex market.
Down the hierarchy in the spot forex market are the smaller banks, big multinational companies, hedge funds and other institutional investors or speculators and the retail forex brokers. The wealthier you are and the more money you have or are able to get credit for, the more chances you have of accessing this big boys club.
The independent retail traders lie at the bottom of the market structure. These big players conduct currency transactions in the interbank market if they have large capital and have credit standing with the large banks. Technology has managed to open up this tight group of big boys although not to the extent that you may think. Most banks now operate their own electronic dealing platforms or provide liquidity to a matching system, prime brokerage platform.
So there is no central exchange in the spot forex market to set the prices. Then who sets the currency prices? The retail forex trades trade through their forex brokers. They generally trade in much smaller lot sizes. Central banks are also occasionally involved in currency transactions. Unregulated nature of the spot forex market as well as poor governmental oversight lets the forex dealers to behave the way they want. Because of the tight knit nature of the forex market and its lack of regulation, the spot forex market is an unfair market for the nonprofessional to operate in.
Market makers make the bid and ask prices based on the currency movements that they anticipate will take place. Without a central exchange, the currency prices are set by the market makers.
Many banks have professional traders solely dedicated to trading forex for speculation. Largest banks are the major market makers and they handle billions of dollars worth of forex transactions on behalf of their clients like the other institutions and companies and also for themselves.
This big money laden network is knows as the interbank market. Interbank market is where large banks deal with one another. The resulting massive flow of money handled by these big banks is what primarily drives the currency markets. The interbank market is not a perfect market. Since the information is not freely available, market access is restricted, manipulation takes place, governments intervene and a large number of participants in the market routinely buy and sell currencies irrespective of profit which all comes together to turn conventional trading wisdom on its head in this range bound market.
A small group of commercial and central banks have always handled the majority of the forex transaction with each other and for each other. The transactions carried out by these big banks like the Citigroup, Barclays, UBS, Deutsche Bank, Bank of America, Merrill Lynch etc amounts to the greatest bulk of the total daily forex volume. Most of the trading activity takes place in the interbank market.
How do the big banks deal with one another in the interbank market? The banks deal directly with one another through the electronic brokering platforms like the Electronic Brokering Services (EBS) or Reuters Dealing 3000 Matching. These brokering services get the best available rates for the various currency pairs.
These brokering systems match buying and selling requests from the bank dealers. Between these two competitors they connect at least 1000 banks together. The banks establish specific credit lines with one another in order to deal with one another in the forex market as there is no exchange to serve as each banks counterparty.
Smaller banks that also trade forex also get access to these brokering platforms. Next large companies come. As the main market makers, these big banks constantly quote bid and offer prices to one another thereby making the market.
Author Resource:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Develop Your Own Forex Trading System !
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