Interbank is a loose term held over from the early days when banks traded for clients and themselves over the telephone. Today trading is conducted electronically, with quotes from buyers and sellers matched up on the interbank market automatically. Many interbank members act as market makers for the currency pairs traded on the spot currency market and offer the quotes that ultimately drive the pricing you see in your trading software. Among the largest market makers on the interbank are banking giants such as Citigroup, UBS, Goldman Sachs, and Deutsche Bank. Lehman Brothers was a major interbank market maker prior to its demise in September 2008.
Participants on the interbank are big-dollar players, since the lowest accepted trade size is set at an even $1 million. It isn’t uncommon for orders larger than $100 million to be executed on the spot forex market due to the global size and liquidity of the interbank market. Many banking participants on the interbank fill orders for customers who actually intend to take delivery of the currency being traded; however, most interbank members also trade the bank’s money as speculators attempting to make a profit just like any other currency trader. The advantage interbank market makers have over a regular retail trader is access to order flow information. If you are the market maker and you see all the orders, you have insider information about the direction of the prices. Taking a trade against that information provides a significant source of revenue for many financial institutions.
Interbank members trade only with partners with which they have arranged credit agreements. This is an important point to understand because it affects the pricing you receive from your currency dealer. The quotes flowing from interbank trading partners ultimately drive the pricing you see through your currency dealer’s trading software. The more trading partners a dealer has, the more quotes at which they can execute a trade, resulting in more competitive pricing for you. You should look for a currency dealer with multiple liquidity feeds.
Participants on the interbank are big-dollar players, since the lowest accepted trade size is set at an even $1 million. It isn’t uncommon for orders larger than $100 million to be executed on the spot forex market due to the global size and liquidity of the interbank market. Many banking participants on the interbank fill orders for customers who actually intend to take delivery of the currency being traded; however, most interbank members also trade the bank’s money as speculators attempting to make a profit just like any other currency trader. The advantage interbank market makers have over a regular retail trader is access to order flow information. If you are the market maker and you see all the orders, you have insider information about the direction of the prices. Taking a trade against that information provides a significant source of revenue for many financial institutions.
Interbank members trade only with partners with which they have arranged credit agreements. This is an important point to understand because it affects the pricing you receive from your currency dealer. The quotes flowing from interbank trading partners ultimately drive the pricing you see through your currency dealer’s trading software. The more trading partners a dealer has, the more quotes at which they can execute a trade, resulting in more competitive pricing for you. You should look for a currency dealer with multiple liquidity feeds.
