Interbank Forex Trading
Forex is known to be the largest market in the world, having an average daily volume of approximately $2,000 billion as shows a 2004 report made by Bank for International Settlements. It is a decentralized market where not every trade is recorded in a common 'record file'. Each transaction is registered by the one who makes bid and ask spreads in the currency market. The major market makers are represented by the largest banks in the world, therefore interbank Forex trading represent the top level of the respective market.
A more detailed definition presents interbank Forex trading as the financial system and trading of currencies that takes place among banks and financial institutions, excluding retail investors and other smaller trading parties. The banks deal with each other on a regular basis either on behalf of themselves or of their customers.
Interbank Forex trading is governed by intensive competition, which leads to tight spreads and fair pricing. It is from this system that individual investors get the price quotes and the place where Forex brokers offset their positions. Because the parties involved in interbank Forex trading include the largest mutual and hedge funds in the world as well as large multinational corporations, the access of individual traders to the pricing system available on the interbank market is restricted. This does not mean that this segment is not relevant to individual investors. Understanding how interbank market works helps them to comprehend the way in which retail spreads are priced and to decide whether the price from the broker is fair.
As far as the pricing is concerned, interbank Forex trading is characterized by self-regulation systems. This feature is similar to the pricing system from a centralized market because both types of market imply accommodating prices to a certain party's interest.
As 'Wall Street Journal Europe' showed in 2006, 73% of total Forex volume is ensured through interbank Forex trading operated at the level of ten banks. Deutsche Bank, Citigroup, HSBC and UBS are included among them. Although differing in the overall structure, each bank has a separate group specific to every one of them, which is called Foreign Exchange Sales and Trading Department. The former is responsible for delineating the prices in interbank Forex trading. The prices are established depending a variety of factors including:
* the current market rate;
* the level of volume available at the current price level;
* the point where the currency pair is headed;
* inventory positions of each bank.
Interbank Forex trading has a great impact and influence upon the relationship between individual investors and brokers. The more well capitalized the major market makers are, the more credit relationships they can establish.