Hello guys
I am new in the forum.I have some basic knowledge about forex.Although,I have an assignment to do for university and I need some help from the experts on this forum. My question is:where do the currency exchange offices supply money from? They sell on more expensive rates, so they need to get money with the current rate in stock market in order to make money from the spread.If you have any additional information I would like to tell me.
Please help me out
First of all the stock market has nothing to do with forex, well it does in a round about way (the value of the company that is doing the large orders to convert its currency due to international business trasactions） but i doubt that is the point of your report. Currency exchange offices (i dont know what you mean by that i am thinking brokers here). So lets start with the basic structure of the Forex Market we have Teir 1 liquidity providers, dukascopy, deutche bank and Citibank. These guys are large banks who communicate to eachother over an interbank network. Remember this is not a centralized exchange. So what happens is over this network each bank will display its bid and ask for any currency it needs. Only if citibank needs to buy euros because its own inventory is insufficent it will search the best price (ask). Now say Deutche bank has the offer at 1.4000 and Dukascopy is at 1.4001 well obviously they are going to lift the 1.4000 figure. Now we have the 2nd tier banks these might be local banks, hedge funds, even larger banks that do not participate in the interbank network (i believe are around 20 banks in the world that are in the interbank everyone else is teir 2). These people recieve their liquiditiy (currency) from the tier 1 providers. Then we have the 3rd teir, this could be large trading individuals, trading firms, retail brokers and the like. then we have the 4th tier basically everyone here at baby pips, the retail trader. Yes brokers and these liquidity providers are supposed to make money on the spread. Say the spread at the tier 1 was .02 pips at 2 tier its .5 pips at tier 3 its 1 pips, and as a retail trader its 1.5 pips. Everyone along the chain takes a cut, but this is assuming they are not market makers but directly ECN or STP brokers. If they are a market maker then they make money from the spread as well as making the market, by taking the other side of your orders. then hedging it through their liquidity providers someone a level above them like a tier 2 bank. As market makers there optimal position is net flat. Making money from the spread only, and having no outstanding risk. But if you lose money then they get to pocket that as well + spread. Assuming they are able to manage their external hedges or had enough internatal inventory/ client matching to basically just bucket the order. anyway that is the basic structure and tiered system of the forex market. I no idea what this has to do with a university assignment but it sounds cool. anyway I hope that helped.
thank you for your answer
But I dont mean brokers. I mean offices like Bureau de Change, which exchange currency in airports for travelers. I know is quite irrelevant with forex, but please help me out!
These offices work exactly the same, they may be connected to a 2nd or 3rd tier entity but they make their money off of the difference between the price they receive the currency in and the price they exchange it for you. This is in effect creating a spread again, as all of the other steps along the chain do.
Do you know where they get money from, in order to sell it more expensive?