Trading in the Interbank Market

The interbank market is a fast-paced, adrenaline rush where trillions of dollars change hands daily. The interbank market is made up of a network of international banks functioning in financial centers across the world.

These banks host trading operations to facilitate trading for their own accounts known as proprietary trading. This also allows them to provide currency trading services for the customers of their banks. These customers may be corporations, government agencies, hedge funds or wealthy private individuals.

There are no guarantors for the trades. It is simply an agreement between two counterparties. The bank’s balance sheet and promise to make the payment is the only guarantee given.

The majority of the trading is done through electronic matching services. These matching services have prescreened credit limits. Pricing is anonymous prior to the deal being finalized. Once the transaction goes through, both parties’ names are revealed.

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The main international FX trading banks have established electronic trading platforms via the Internet. This enables customers direct access to the market, giving them better prices. In addition, the algorithmic or system trading is made possible by electronic trading. Twenty-five to thirty percent of trades are done using this system.

Currency Trading Players

  • Flow Traders: Also known as execution traders. They execute customer orders in the market and show the two-way prices at which to buy and sell. These traders are generating most of the price action
  • Proprietary Traders: These traders do speculative trading for the bank’s own accounts.
  • Forward Traders: These traders carry out transactions in a market where the interest rates of the various currencies are traded.
  • Options Traders: These traders manage the bank’s portfolio.
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