The Forex Interbank Market
The Bank of International Settlements released a report in April 2004 saying that the forex market produces an average volume of an estimated two thousand billion dollars each day thus becoming the biggest market globally. However the Foreign exchange market is not like the Chicago Board of Trade or the New York Stock Exchange because it isn't centralized.
A market that is centralized every transaction gets to be recorded by the traded volume and the price transacted. Usually there is a center where one can trace all these trades and usually there is one market maker or one specialist. The market for currencies is unlike those markets because it is decentralized. No exchange can record each trade the market maker for each exchange should record the transaction and keep it as confidential information. The biggest banks of the world are usually the first market makers who give a bid and request for spreads in the market of currencies.
They even have to deal with one another in a continuous basis. They can represent the customers or themselves. The inter bank market is the term used for the market where these banks make transactions.
There is a competitive atmosphere that exists among the banks which helps secure spreads to be tight which results in fair prices. This is where most of the individual investors get their quotes for prices and where most brokers in the forex market equalize their own positions. Most of the individual investors cannot gain access to the prices made available in the interbank.
The interbank customers usually include those with big hedge and mutual funds all over the world. They also include the big companies which have millions or billions of dollars but understanding how the market of interbanking works is also important for the individuals since it is one of the best means to comprehend the pricing for the retail spreads. It is also a good way to check if the investor is still getting a fair price from the broker.
Who makes the prices? There are pros and cons in being a trader in a market which is decentralized. In a market that is centralized a trader gets the advantage of finding the volume of the market in general but then the rates or prices can also be distorted easily to the advantage of some specialists which can be unfair for the trader. The market of interbank has a nature of making it difficult for traders to regulate but they play an important role in the trading industry.
The trader have to self regulate themselves and sometimes this can be much effective than the regulations from the governments. Brokers must be affiliated with the CFTC or the Commodity Futures Trading Commission. They are also called futures commission merchant. They should also become members of the NFA or National Futures Association. CFTC ensures that the brokers meet their standards by regulating them.