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Forex Seminar
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Forex market has an average volume of daily $2000 billion as per April 2004 report submitted by Bank for International Settlement. This volume makes the Fx market largest in the world. Unlike equity market FX market dont have a centralized exchange like NYSE or NASDAQ, etc. Each transaction is being recorded and prices are dealt in the centralized market. In the equity or commodity market there is always one market specialist or market maker who trace all trades in the market. However Currency market is a decentralized one, where no one is tracking or tracing trades other than their own trades. Certainly there too market makers are present, but they track and record information about their trade for proprietary account desk.
The bid and ask price are being made in a currency pair by the largest banks like UBS, HSBC, Deutsche bank, Citibank etc. they use to deal consistently among themselves or for their clients. It is called as the Interbank market. There is sharp competition between these banks and this will make sure tight spreads and fairness in pricing of derivatives also. Most individuals are unable to access or influence the price in this market, because the customers who are sitting in the interbank desk will be either big mutual funds or hedge funds who have millions of dollars to pump at any time in the market. Moreover it is very essential for an individual investor to learn about the interbank market operation in order to cross check the fairness of the prices offered by his broker and to understand how the retail spreads are priced.
Price maker:- trading in decentralized market has its own merits and demerits. In centralized market the specialist or market maker will drive the market. Where as FXs Interbank market is very difficult to regulate even though such big players are there. So sometimes self-regulation will be better than government regulation. A Forex broker has to be registered with Commodity future trading commission (CFTC) as merchant for future commission and also become a member of National Futures Association (NFA). The CFTC will regulate and check the broker whether he is meeting or following all the regulatory guidelines or not.
According to the famous journal Wall Street Europe, 73% of total Forex volume is carried through 10 banks. These banks include Deutsche Bank, HSBC, Citigroup, UBS, etc. each bank will have a separate department to handle and play in the Forex market. This Foreign Exchange group or Treasury
team will have two desks, one trading and other sales. This sales desk is mainly responsible for taking orders from the clients and to complete the deal. Now a days online Forex trading platforms are being offered by the banks for the clients to trade, but for big shots who plays in a minimum lot of 10 to 100 big figure will get better price over phone than through electronic platform.
There will be generally one or two market makers responsible for one currency pair on a Forex spot-trading desk. Say for example, for GBP/USD pair there will be one market maker and he or she will have secondary dealer who will handle small transactions in this pair. For commodity currencies there will be one separate dealer, who will deal in currencies like CAD, AUD, NZD, etc.
Determining Price:- there are various factors to be consider in order to determine the price, they are current market price, volume level available at current market price, views about the currency pair, and its inventory position. If the market maker believes that euro will appreciate against USD, then they will give better quote for their clients who want to sell Euro and buy dollar. Thus by keeping those bought euros this dealer can sell it at better price when the euro starts soaring. But if their view is bearish on Euro they will offer very poor price for their client who want to sell euro, because this dealer is not sure about the price to come better than current market level.
Trading station:- like our brokers trading platform bankers do have two primary dealing trading station, one is offered by Reuters Dealing and another by Electronic Brokerage Services (EBS). Interbank market is approved by credit system, where every bank is trading with another bank solely on credit relationship developed by them. If the banker is bigger the will have better credit relation and will get best price for their deals. Smaller clients and bankers are restricted to deal only the selected number of larger banks and they will not be able to deliver good price. Reuters Dealing as well as Electronic Brokerage Services (EBS) offers trading in major currency pairs.
Individual investors who keeps better relation with banks by doing good volume business will get attractive pricing from the bankers.
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