Retail clients now readily access the Forex market. Indeed, there was a time when the FX market as a whole was only really the preserve of banks, institutions, and the very wealthy. These aspects combine to preclude most players from directly accessing the interbank market. Furthermore, deals in the interbank market are typically very large. The banks buy and sell currencies between each other on this credit basis alone. One of the foundations of the interbank market is the credit relationships that the largest banks have between each other. Despite the huge volumes that go through the interbank market, a large portion of Forex participants do not have direct access. There's more, though: the banks' continuous commitment to buy and sell currencies is a cornerstone of all pricing in the FX market. The trades between the large banks form the core of the FX market by volume. Volumes available at the prevailing market rate, and the volume of the deal they are quoting for.Their view on the future performance of the currency pair.Their own exposure – what positions they already have on their book.The prevailing rates being quoted elsewhere.The Forex Market Makers Method – How Do They Set Their Prices?īank dealers weigh up a number of concerns when making their prices. They can do this by either making a trade with another bank, or by pricing accordingly, in order to attract trades in a certain direction. Of course, a dealer may also choose to take a position in a currency at their discretion. Now, the large banks see huge flows of foreign currency transactions from their operations around the world.īecause of this, they can achieve significant profit simply by collecting this spread day after day. If they see enough flow at both sides of their quote, they can simply collect the bid offer spread, while netting off their exposure. One way a Forex market maker makes profit is by seeing two-way business. How quickly or slowly, or how much risk they lay off will be at their own discretion. In terms of taking this exposure onto their book, a market maker may subsequently choose to hedge the exposure with another bank, if they are able to gain a favourable rate. In other words, they are not matching the trade with another party, in the way that a broker would. The third point establishes that a Forex market maker is a counterparty to a Forex trade. What are the constraints mentioned in the second point above?īasically the quote may only be good in a certain minimum or maximum size, and the price will only be good if dealt with in a timely manner. Takes the resulting exposure on to their own book (at least initially).Commits to accepting deals at these prices within certain constraints.Sets bid and offer prices within a certain currency pair.A market maker quotes two-way prices in a certain currency pair, thereby making a market.Ī Forex market maker essentially does three things: Therefore, we can say that the institutions that comprise the interbank market are the primary market makers in the FX market. Though these prices are intended for the interbank market, they effectively permeate their way to the retail side of the market, as we shall discuss later. They provide prices at which the bank commits to buying and selling currencies from their peers in the interbank market. It is here where we can see the core role of the FX market maker.Įach bank has dedicated market makers for each major currency pair. One way of describing it is as the wholesale level at which currencies are exchanged. The interbank Forex market comprises the transactions conducted between the major banks. Market Structure of Forex Market MakersĪt the top of the tree sits the interbank Forex market. To better understand how market makers fit into the overall picture, we need to take a quick look at the market as a whole. They play a significant part in FX prices. This article is going to look at a key type of operator in the Forex market, the role of Forex Market Makers. The Forex market breaks down into a large number of players of varying sizes.
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