I am a new member and very much like this website. Here is a question that has puzzled me with no answer anywhere.
I understand that exchange rates follow supply/demand but how and who physically decides the chart at any moment.
For example with Brexit vote as people speculated that the pound will fall so they sold it then that triggered cheaper pound indeed but who actually decided that. Is it a formula. Couldn’t the banks just keep the rate or modify it as they wished?
Well, you’re asking how “charts” are decided, but I think what you really want to know is how the decisions that are significant enough to affect price movements are decided? (Charts themselves are merely a display of what’s happening.)
People do loosely use the terminology of “supply and demand” to describe forex markets. I don’t think it’s quite right. Price changes in forex, more realistically, are determined by “buying pressure and selling pressure” rather than by “supply and demand” (albeit that I suppose one could argue that it amounts to much the same thing in its [I]effects[/I]).
Nobody decides “to move the chart” per se: they decide “to buy” or “to sell” (albeit, in some cases, knowing or expecting that their transactions will have an effect on the price).
I suspect that the answer is “the management/policy-makers/bias-imposers in many big financial institutions all at around the same time”. Which is just a long-winded way of saying “big market sentiment”.
The actual [U]mechanism[/U] of why/how their decisions do move forex prices is (kind of!) described in this thread.
Welcome to the forum … though I’m not sure if I’ve really answered your question! :8:
Thanks Lexys for the careful reply. It is indeed useful to know that. So I if am right you mean there is no equation or software algorithm that just goes around creating the chart but rather the market pressures.
This then drags me to ask why it is one and same chart and one and same final spot rate all around the world?
In simpler terms assume UK Bank decided to help the Pound after Brexit vote so it offered dollars physically at low price then that will force the “chart people” to average the UK offer with any other offers around the world and come up with new spot rate. Am I confused here?
Different brokers will sometimes have very slightly different prices, so it’s not identical … but nearly; yes.
It reflects the currently available “interbank market” prices, and that’s a worldwide market. Any anomolies in it, in different places, are probably almost immediately ironed out by the automated high-frequency arbitrage trades made by some big financial institutions, too.
I don’t know …I think it’s pretty rare for governments to do that on any significant scale (though Japan and Switzerland do come to mind), and I think it may even be contrary to current Bank of England policies to do it “routinely”. They’ve certainly done it once or twice in the past (most famously when Norman Lamont was Chancellor) and had their fingers burned. You need someone like PipMeHappy, Clint or TurboNero, who all understand economics much better than I do, to answer that one “properly”, I think. :8:
There is no exchange for FX trading like there is for stocks. Anyone can trade FX with anyone else. The rate you see on your charts is going to roughly follow the ‘interbank’ rate mentioned above which is what the big banks use between themselves. But soem brokers to play around with the rate and change it to suit themselves. This is why I use an ECN broker. They don’t play around with the price so it is a much better way to trade
Most credible brokers like most but not all ECN brokers quote you off of their quotes. Meaning they are getting there quotes from multiple banks. They are usually going to quote you either the cheapest price or the average price (will vary broker to broker). These interbanks are going to compete against each other to get your brokers business and thats were your precise quotes come from.
For example lets say you have a dollar of USD (to keep this simple) and you want to buy AUD. An inter bank can charge you what ever they want for your $1 for a single Aussie dollar. Problem there is no one is going to be will to pay that if it is not reasonable. So in order for a bank to compete they may quote you say for your $1 they will give you 1.25 Aussie dollars. Thats an exchange rate of .7500 AUD/USD. Seeing as how AUD/USD is pretty close to there thats actually a close figure for a quote but now other banks are going to step in to try and get your $1 so the may quote you are little better. Thats how these quotes come in. This is a question I had not to long ago myself as since there is no central exchange who dictates the price. It took me a lot a research and you are right there is no direct answer out there. There is if you dig. You have to dig into brokers and how they say they come up with price. FXCM is very open about how they come up with that price and so are Oanda and a couple other I looked into. Most offer the best price they were quoted for you (plus there spread of course).
Here is where you need a reputable broker though. ECN brokers will try to pass your money to the bank that quoted them. Bucket shops will not so there price feeds do not have to reflect any bank instead its there price quote to you (see where there might be a conflict of interest here). Most bucket shop broker are going to take the other side of your trade meaning if you are buying (long) they are going to quote you a price at a mark up (spread) and they are actually going short to hedge there risk on your trade. I am will to bet the spread they are going to have to pay the interbank will be charged right back to you.
Now I must point out also that even with a ECN broker you have to understand something. If you are trading on micro account they are not just passing your little $20 plus there $980 (to make close to 50:1 leverage) on to the interbank. If they did their transaction costs would eat them alive. Instead they are going to pile your trade with others and push millions to the interbenk at one time to keep their costs down. With that in mind I am sure their price feeds do reflect that to a point and thats why price feeds differ from broker to broker. Its simple greed on the part of the interbank if a broker is only pushing a couple grand here and there off to the bank then they are going to get retail prices but if they are tossing millions at a time then they will get wholesale prices. So if you want the best price feeds you might want to look into brokers that have a large amount of transactions or have a hell of an account to push the money. This is why most ECN brokers have in there fine print with micro account they reserve the right to take the other side of your trade. Thats because if they do not get enough in customer trades to make it worth passing off to the interbank then they are better off acting as the bank themselves. That is to keep the best quotes (wholesale) from the banks quoting them.
I hope this makes any sense as it did to me as I was typing this but I have had some drinks so what make sense to me may not to others right now. It not that what I typed is not accurate but the presentation may have been off. Anyhow I hope this helps. Hopefully Jason and other reps from the broker here on this page can chime in on how they get there price feeds.