Forex market has seen its fair share of diversity among its traders, from ordinary people looking to change their lot in life to major financial players. While they all have access to the same markets, they do not always find themselves in the same parts of those markets. Some major financial institutions have introduced their own system for currency exchange on a large scale, out of reach for smalltime investors. This interbank market cannot be accessed by outsiders, except through one of the banks which are already inside. A bank may act on behalf of some of its clients on the interbank market, but this is not a common occurrence, as most trading banks do on the interbank market is for their own purposes.
While it may seem easy to view interbank markets as exclusive and practically outside of forex markets, this is not the case. Most banks simply prefer to conduct forex trades among themselves, since there are few forex traders capable of handling their orders on their own except other banks. Interbank markets are integral parts of forex; as a matter of fact, roughly half of money that goes through forex markets on a daily basis actually comes through interbank trade.
On the other hand, by trading among themselves outside retail level, banks help each other stay liquid by avoiding premiums they normally charge their clients for similar arrangements. The interest rate is the biggest difference: since banks have direct access to the central banks of their respective nations, they get their funding at bargain costs, especially when compared to regular customers. This difference in pricing is where banks make most of their income.
On the interbank markets, banks prefer to interact with each other directly or through specialized brokering platforms. The largest and most commonly used are the Electronic Brokering Services and Thomson Reuters.
Interbank Market Subdivisions:
Spot markets, where financial transactions and contracts get realized immediately or (if trading futures) paid immediately but delivered within a month. They are also called ‘cash markets’ since most of the transactions are conducted in cash at current market prices, regardless of delivery or other issues.
Next, there are forward markets. On forward markets, parties involved get into binding contracts setting prices for financial instruments as well as the deadline for delivery.
Society for Worldwide Interbank Financial Telecommunication (SWIFT) – a network with a unified system of codes which enables banks to exchange data containing instructions and information on financial transactions, in order to, say, confirm international funds transfers. It also trades in software and services, most of which are related to the use of the SWIFTNet network. The way swift works is a topic for another article.
In any case, interbank markets are an important part of forex, as they handle around half of overall money volume, even if most benefits are reserved solely for major players. After all, it takes time to open financial markets. One day, perhaps…