Interbank Forex Markets Explained

Interbank Forex MarketsThe Interbank forex markets, as obvious from the term is the highest level in the foreign exchange markets where banks exchange currencies directly with one another. The Interbank forex markets can also be referred to as the forex wholesale market where most of the currency transactions are performed and is mostly used for trading within the banking community. The interbank forex markets is unregulated and decentralized, thus there is no central location or an exchange where these transactions take place, unlike the stock markets where transactions are carried out at the stock exchange.

What comprises the Interbank Forex Markets

The Interbank makers is made up of three components.

Spot markets: Also known as the organized or OTC (over the counter) market. This is made up of cash market is known as the publish financial markets where financial tradable instruments and/or commodities are traded for immediate delivery. The spot market prices are individually agreed between the parties and therefore the prices are usually not published. The spot markets entails a two day delivery period in order to move cash from one bank to the other. The online forex trading markets is usually comprised of the spot markets as trading is purely speculative driven and transactions are done on the spot.

Forward markets: The forward markets is over the counter financial markets that dealins in the CFD’s or contracts for differences for future delivery. Forward markets are also known as forward contracts and are personalized between the buyer and seller which includes the delivery time and amount which is usually determined at the time of the transaction.

SWIFT: Most of us who have ever made an international bank WIRE would have heard about this or BIC (Bank Identified Codes). SWIFT is an acronymn for Society for Worldwide Interbank FInancial Telecommunications. SWIFT is used to send payment orders that are usually settled via the correspondent accounts which the banks have with each other.

What moves the Interbank Exchange Rates

Due to the fact that the forex market is decentralized, banks set their own bid and ask prices taking into account any anticipated currency fluctuations that might take place. It is safe to say that the forex market is actually made up of market makers due to the fact that banks have their own price quotes. Large scale banks such as UBS, Deutsche Bank, HSBC, Citigroup handle large volumes of currency transactions and it is due to the movement of this volume which is the primary driver of the currency prices, especially in a short term perspective. Of course, there are other factors that influence the Interbank exchange rates such as hedge funds, smaller banks and online forex brokers and traders.

How do forex traders fit into the bigger game

Forex traders make money by purchasing one currency and selling another currency. The difference in the bid and ask price of these currencies is how profits are made. Therefore, forex traders are familiar with the term, buy low sell high. Forex traders make their profits by the fluctuations in the currency prices as cited above. ECN Forex brokers are the kind of brokers that connect forex traders straight to the tier 1 liquidity providers made up of banks and financial institutions. It is because of the interbank forex markets that ECN forex traders get to see pricing where in most cases the spreads are almost zero.

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