The Professional Interbank Forex Market

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The largest forex trading volumes by far go through the network of professional forex dealers known collectively as the Interbank forex market.

As the name implies, these Interbank dealers usually work for major forex market making banks, their forex brokers or their customers. These larger players tend to trade amounts more than $1 million and execute transactions based on credit lines that banks extend to each other and their customers.

Despite not having a centralized exchange or much formal regulation, this huge currency trading market usually manages to function in an orderly way and provides enough liquidity for almost all commercial forex trades.

As a result, those able to access the Interbank forex market tend to enjoy the best dealing spreads under most trading conditions, although some exceptions do apply such as after major economic data releases as the market digests the new information and adjusts exchange rates accordingly.

Communication in the Interbank Market

This over the counter or OTC network of forex traders and advisors has traditionally communicated via telephones and direct phone lines to other counterparties in the market. Also, forex brokers often communicate Interbank market prices and dealing activity in the most active currency pairs orally using voice broker boxes.

Nevertheless, recent technologically advances have made electronic trading increasingly popular in the Interbank market. This includes transactions done via professional dealing networks like the Electronic Broking Services or EBS Spot Dealing system and the Reuters Dealing 3000 Spot Matching system.

Who Trades Forex in the Interbank Market and Why

The professional Interbank forex market includes a variety of participants that trade foreign exchange for a number of different reasons.

These forex traders might include individuals working at major commercial banks, central banks, fund managers, international corporations, as well as high net worth individuals.

Most of them either deal forex for hedging or speculative purposes like corporations and hedge funds respectively. Nevertheless, many large banks are market makers that provide liquidity to the market. Also, central banks often adjust their currency reserves and intervene to stabilize their currencies.

Other common reasons to trade forex include:

• Handling the import and export requirements of corporations and individuals

• Facilitating foreign security or real estate investment transactions

• Profiting from short-term changes in the level of forex rates

• Managing existing currency positions

 

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