Liquidity providers

Beginner Questions
1

Hi guys,

I have a question about liquidity providers in the cash forex market.

Have read that major banks provide liquidity to the cash forex market. But I read a point in the forum a few days ago which got attention. It was -

  • why would big banks trade forex in any ECN or other retail market place ? They would rather be dealing directly with one another no ? They dont need to go to some retail network. They are big entities with special arrangements to make forex transactions.

  • This led me to think another point - will the big banks be in the business of just doing forex transactions just to make money from it directly ? Will they not be actually exchanging currency as part of a facilitation of Business transactions between companies in different countries ? Example: Huawei sending money to Intel for the processors or something like that. That would be the only scenario (business transactions) where banks would exchange forex. Do they do transactions just for speculation or any other reason on the retail forex market ?

So is it right to say that even though the forex market is trillions of dollars - the retail market just for the sake of trading forex and no other valued purpose is much smaller than that ?

Please let me know your opinion on this

Thank you

2

If I understand this question correctly, you are asking whether the mega-banks (which comprise the interbank network) are engaged [I]exclusively[/I] in currency speculation.

The answer to that is [I]no.[/I]

Currency speculation (trading with their own money) is [I]one[/I] of the activities of the mega-banks, but not their only activity. And this trading does [I]not[/I] represent the largest part of a bank’s total transaction volume.

Completing transactions for clients generates the bulk of each bank’s volume. Those clients include: pension funds, sovereign wealth funds, hedge funds, multinational corporations, second- and third-tier banks, retail aggregators (retail forex brokers), high-net-worth individuals, etc.

[B]Much of the volume handled by the mega-banks on behalf of these clients is speculative activity[/B] – but, it is these clients, not the mega-banks, who are doing the speculating.

Yes. As noted above, completing transactions for multinational corporations is one of the functions of the interbank network.

The megabanks do not [I]“do transactions … on the retail market”,[/I] to quote your question.

Rather, [I]a portion[/I] of retail forex trading volume is traded upstream [I]in the interbank market.[/I] The portion which never reaches the interbank market is matched internally by retail forex brokers. All of this retail trading activity is speculative.

Correct.

The $5.1 Trillion worldwide foreign exchange market is the largest financial market on the planet, by far.

One-third of that huge amount (that is, $1.7 Trillion) is spot forex trading.

The spot forex market consists of two components: institutional spot forex, and retail spot forex. Institutional spot forex trading comprises approximately 90% of the total $1.7 Trillion spot forex market, while [I]retail spot forex trading[/I] comprises only about 10% of total spot forex trading.

In other words –

[B]Our little corner of the worldwide foreign exchange market – the retail spot forex market – comprises less than 3½% of the overall $5.1 Trillion market.[/B]

If you’re ready for some heavy reading in these subjects, dive into the [I]BIS Triennial Central Bank Survey.[/I]

Here is a LINK to the pdf of the latest (2016) Survey.

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