Interbank Currency Trading: What It Means For You
Interbank currency trading is a term that you might see many times on forex websites and forums. So what does it mean?
Originally the forex market consisted almost entirely of banks and other large financial institutions who were exchanging the various currencies of the world with each other. Each one of them would have a dealing desk from which they would communicate with the other banks in their own financial center and around the world. They would be quoting each other the prices at which they or their clients would be prepared to exchange one currency for another and striking deals when they could get a match.
The word ‘inter’ means between, so the interbank market was the market set up between these institutions. As well as banks, they included insurance companies, retirement fund holders and even governments, but in the forex market they are usually all called banks to keep things simple.
When most of the major currencies’ exchange rates ceased to be fixed in the 1970s, speculative trading became possible. The banks employed full time traders to increase their profits by speculating on the rise and fall of currency prices. At that time the trading was done almost entirely by telephone. By the beginning of the 21st century it was becoming possible to use the internet.
Now that so many homes in the more prosperous countries have computers with a high speed internet connection just about anybody can become a currency trader on their own account. However, we do not have the ability to set up our own dealing desk and communicate directly with the banks and other traders. We need an intermediary, and this is where forex brokers come in.
Forex brokers, or dealers, take on the retail traders like you and me as clients and then negotiate with the interbank currency trading market. Some brokers have their own dealing desk so they are directly part of the market. These brokers are less likely to offer mini forex accounts and most of their clients will be trading standard lots.
Other brokers have an arrangement with one of the banks to use their dealing desk which is another link in the chain. This gives them the ability to accept smaller fund balances but it can mean higher costs. You may have a higher spread or you may find that the price is manipulated to guarantee the broker a fee on top of the bank’s spread.
Many people these days use the term interbank to include anybody who is involved in foreign currency exchange as a buyer or seller. However, interbank currency trading is not the same as retail forex trading. Understanding the difference can help you to ask questions of a potential broker that could result in a better deal for you.
