Interbank foreign exchange market

Last updated
Foreign exchange
Exchange rates
Markets
Assets
Historical agreements
See also

The interbank market is the top-level foreign exchange market where banks exchange different currencies. [1] The banks can either deal with one another directly, or through electronic brokering platforms. The Electronic Broking Services (EBS) and Thomson Reuters Dealing are the two competitors in the electronic brokering platform business and together connect over 1000 banks. [1] The currencies of most developed countries have floating exchange rates. These currencies do not have fixed values but, rather, values that fluctuate relative to other currencies.

Contents

The interbank market is an important segment of the foreign exchange market. It is a wholesale market through which most currency transactions are channeled. It is mainly used for trading among bankers. The three main constituents of the interbank market are:

The interbank market is unregulated and decentralized. There is no specific location or exchange where these currency transactions take place. However, foreign currency options are regulated in a number of countries and trade on a number of different derivatives exchanges. Central bank in many countries publish closing spot prices on a daily basis. The central banks of many economies implement their monetary policy by manipulating instruments that allow them to achieve a certain value for an operational objective.[ clarification needed ] Instruments are defined as the variables directly controlled by a central bank, such as the cash ratio, the interest rate paid on funds borrowed from the central bank, and the structure of the balance sheet.[ citation needed ]

Market makers

Unlike the stock market, the foreign currency exchange market (Forex) does not have a physical central exchange like the NYSE. [2] Without a central exchange, currency exchange rates are made, or set, by market makers. [1] Banks constantly quote a bid and ask price based on anticipated currency movements taking place and thereby make the market. Major banks handle very large forex transactions often in billions of units. [1] These transactions cause the primary movement of currency prices in the short term.

Other factors contribute to currency exchange rates and these include forex transactions made by smaller banks, hedge funds, companies, forex brokers and traders. Companies are involved in forex transaction due to their need to pay for products and services supplied from other countries which use a different currency. Forex traders on the other hand use forex transaction, of a much smaller volume with comparison to banks, to benefit from anticipated currency movements by buying cheap and selling at a higher price or vice versa. This is done through forex brokers who act as a mediator between a pool of traders and also between themselves and banks.[ citation needed ]

Central banks also play a role in setting currency exchange rates by altering interest rates. By increasing interest rates they stimulate traders to buy their currency as it provides a high return on investment and this drives the value of the corresponding central bank's currency higher with comparison to other currencies. [3]

See also

Related Research Articles

<span class="mw-page-title-main">Exchange rate</span> Rate at which one currency will be exchanged for another

In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of the euro.

<span class="mw-page-title-main">Money market</span> Type of financial market providing short-term funds

The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less.

<span class="mw-page-title-main">Foreign exchange market</span> Global decentralized trading of international currencies

The foreign exchange market is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market.

Foreign Exchange Reserves are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets. Reserves are held in one or more reserve currencies, nowadays mostly the United States dollar and to a lesser extent the euro.

In finance, a currency swap is an interest rate derivative (IRD). In particular it is a linear IRD, and one of the most liquid benchmark products spanning multiple currencies simultaneously. It has pricing associations with interest rate swaps (IRSs), foreign exchange (FX) rates, and FX swaps (FXSs).

A currency pair is the dyadic quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market. The currency that is used as the reference is called the counter currency, quote currency, or currency and the currency that is quoted in relation is called the base currency or transaction currency.

Electronic Broking Services (EBS) is a wholesale electronic trading platform used to trade on the foreign exchange market (FX) with market-making banks. It was originally created as a partnership by large banks and then became part of CME Group.

<span class="mw-page-title-main">Currency appreciation and depreciation</span> Change of currency values relative to other currencies

Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system in which no official currency value is maintained. Currency appreciation in the same context is an increase in the value of the currency. Short-term changes in the value of a currency are reflected in changes in the exchange rate.

Scalping, when used in reference to trading in securities, commodities and foreign exchange, may refer to either

  1. a legitimate method of arbitrage of small price gaps created by the bid–ask spread, or
  2. a fraudulent form of market manipulation.

The carry of an asset is the return obtained from holding it, or the cost of holding it. For instance, commodities are usually negative carry assets, as they incur storage costs or may suffer from depreciation. But in some circumstances, appropriately hedged commodities can be positive carry assets if the forward/futures market is willing to pay sufficient premium for future delivery. This can also refer to a trade with more than one leg, where you earn the spread between borrowing a low carry asset and lending a high carry one; such as gold during financial crisis, due to its safe haven quality.

Direct market access (DMA) is a term used in financial markets to describe electronic trading facilities that give investors wishing to trade in financial instruments a way to interact with the order book of an exchange. Normally, trading on the order book is restricted to broker-dealers and market making firms that are members of the exchange. Using DMA, investment companies and other private traders use the information technology infrastructure of sell side firms such as investment banks and the market access that those firms possess, but control the way a trading transaction is managed themselves rather than passing the order over to the broker's own in-house traders for execution. Today, DMA is often combined with algorithmic trading giving access to many different trading strategies. Certain forms of DMA, most notably "sponsored access", have raised substantial regulatory concerns because of the possibility of a malfunction by an investor to cause widespread market disruption.

The Kazakhstan Stock Exchange is a stock exchange located in Almaty, Kazakhstan. The exchange was founded in 1993.

<span class="mw-page-title-main">Currency intervention</span> Monetary policy operation

Currency intervention, also known as foreign exchange market intervention or currency manipulation, is a monetary policy operation. It occurs when a government or central bank buys or sells foreign currency in exchange for its own domestic currency, generally with the intention of influencing the exchange rate and trade policy.

Retail foreign exchange trading is a small segment of the larger foreign exchange market where individuals speculate on the exchange rate between different currencies. This segment has developed with the advent of dedicated electronic trading platforms and the internet, which allows individuals to access the global currency markets. In 2016, it was reported that retail foreign exchange trading represented 5.5% of the whole foreign exchange market.

A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another measure of value, such as gold.

A foreign exchange derivative is a financial derivative whose payoff depends on the foreign exchange rates of two currencies. These instruments are commonly used for currency speculation and arbitrage or for hedging foreign exchange risk.

<span class="mw-page-title-main">Matchbook FX</span>

Matchbook FX was an internet-based electronic communication network for trading currency online in the Spot-FX or foreign exchange market. It operated between 1999 and 2002.

A currency transaction tax is a tax placed on the use of currency for various types of transactions. The tax is associated with the financial sector and is a type of financial transaction tax, as opposed to a consumption tax paid by consumers, though the tax may be passed on by the financial institution to the customer.

A non-bank foreign exchange company also known as foreign exchange broker or simply forex broker is a company that offers currency exchange and international payments to private individuals and companies. The term is typically used for currency exchange companies that offer physical delivery rather than speculative trading. i.e. there is a physical delivery of currency to a bank account.

<span class="mw-page-title-main">Midpoint (company)</span> Canadian financial services company

Midpoint is a UK headquartered, Toronto and Frankfurt listed company providing international payments and peer-to-peer foreign exchange services to individual and corporate customers. Midpoint is the world’s first dedicated peer-to-peer international foreign currency matching platform. The company's patented matching technology was the first application of peer-to-peer concept in the spot forex market.

References

  1. 1 2 3 4 Cheng, Grace (2007). 7 Winning Strategies for Trading Forex. Harriman House Limited. ISBN   978-0857190246.
  2. ↑ Miller, Rich (30 June 2011). "NYSE's Data Fortress Powering the Financial Cloud". Data Center Knowledge. Retrieved 11 March 2015.
  3. ↑ "Central Banks' Control of Foreign Exchange Rates". EF. Retrieved 11 March 2015.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.