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The Foreign Exchange Interbank Market

When you look at forex brokers you may find some that state that they have access to the interbank market.  Brokers offering this kind of access should be treated with caution because the interbank market is available to banks only.  When you start trading on the foreign exchange it is important that you know what the interbank is and how it works.

What is the Interbank Market?

The interbank market is not the kind of market you may expect.  There are a lot of people who assume that the interbank is like the spot market, but only banks can access it.  This is not actually true because forex trading does not have a central exchange.  This means that the interbank is simply the network that the major banks use to conduct their foreign exchange transactions.

Can Retail Foreign Exchange Traders Access the Interbank?

It is very unlikely that a retail trader will be able to get the benefits that are offered on the interbank.  The amount of money that is needed to trade on this market is far greater than what a retail trader will have.  The main players who benefit from the interbank are the banks, hedge funds and mutual funds.  Only these players have the capital needed to trade on this market.

Why You Need to Know About the Interbank

As you cannot trade on the interbank you may wonder why you need to know about it.  The interbank plays a role in the spreads that your forex broker can offer you.  When you know about the spreads that this market creates you can determine whether or not you are getting a fair deal from your forex broker.

The Interbank Regulations

As the forex market is decentralised it is hard to regulate.  This is why many countries have taken to regulating the retail brokers.  These are the easiest areas for the regulatory bodies to control and the only parts of the market that have a set physical location.  These regulations are in place to ensure that the retail trader gets the best prices possible.  The problem is that the interbank market is not regulated in the same manner.

The interbank market is not actually regulated by any regulatory bodies.  The transactions that take place on the market are also outside the control of the regulatory bodies.  However, you do not actually have to worry about this because the unregulated nature of the market does not affect the retail trader very much.

Determining the Prices

On the interbank market the bank dealers are the ones that determine their base price.  These prices are affected by a number of factors from the current market conditions to the views of where the currency is heading.  If the dealer thinks that the currency will go higher then they may offer a more competitive rate on the currency pair.  However, if the dealer feels that the currency is going to move lower then they may offer a lower price which is not very competitive.  It is these prices that affect what the forex brokers you deal with can offer.