The interbank market caters to both commercial turnover and large amounts of speculative trading every day. A lot large banks may trade billions of dollars, daily. Some of this trading is takeover on behalf of customers, but some are conducted by proprietary desks, which are trading desks for the bank’s own account.
Forex Trading With Banks
Until recently, foreign exchange brokers did large amounts of business, easily interbank trading and matching unknown counterparts for large fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is seems to be smaller than just a few years ago. Here are no central exchange headquarter for foreign exchange because it is an open market where dealers negotiate their own price feeds through proprietary platforms. The main geographic trading center however, is in London, followed by New York, Tokyo, Hong Kong and Singapore.
Foreign exchange banks throughout the world participate and play a big role in forex, although their roles have been greatly reduced from yesteryear. John Atkin points out in his book The Foreign Exchange Market Of London that “The Bank had long used a mixture of nods, winks and arm twisting to influence the behavior of participants in the domestic money and banking markets.” It is no secret that Foreign exchange banks dominate the top level of access for the best Forex spread. Using their big pool of clients along with their own accounts, inter-bank market made up more than half of all Forex transactions.
Apart from normal banks, central banks also participate in the foreign exchange market to regulate currencies in protection of their economy. Central banks or and national banks serve a dominant role in controlling inflation, interest rates and money supply. Since a country’s currency rates have direct implications on its economy through the trade balance, almost all central banks tend to intervene to influence the value of their currencies. This is known as managed float. Central banks can determine foreign exchange rates to a certain extent, as they have huge foreign exchange reserves in hand to stabilize the market. Again, this does not always work as the combined resources in the actual market usually have a bigger say.