Interbank & FX Broker Relationship??

[olimits7]

Hello, All.

I was just wondering what the inner-workings/relationship is between fx brokers and interbanks?

I know interbanks give fx brokers a bid/ask with a tight spread, and then our fx broker gives us a bid/ask but with a wider spread so they can make money.

1. I would like to know the names of these interbanks?

2. How does an fx broker setup a contract to work with these interbanks?

3. Why can’t we trade directly with these interbanks to get really tight spreads?

4. I’m guessing we can’t trade directly with these interbanks for some reason. However, is there a website to see the true bid/ask spreads that these interbanks are offering, so we can compare them to what our fx broker is giving us?

One final point, I’ve been reading about how some of these fx brokers “stop hunt” and are “bucket shops”, and I’m starting to distrust all of these fx brokers. Not only do we have to worry about actually being profitable in fx, which is hard enough, but we have to worry about our fx brokers working against us. It just really upsets me.

5. Which fx brokers does everyone believe are the most trustworthy/reliable in this industry?

My favorite so far is Oanda.

6. Is there a website that compares all fx brokers against one another, and gives reviews about them?

Thank you,
Olimits7

 

[danfreek]

i really don't know that much about the forex market, but as I understand it, there is no central market for the forex, instead it is an interbank market. Please correct me if I am wrong, but it appears as though you are thinking of the term "interbank" to mean a single institution. It actually means that many banks are trading currencies with one another, sometimes for speculation, sometimes for hedging and sometimes simply to trade currency for business in other countries.

As these banks need someone else to trade with them, a market exists where it is possible to trade with the other banks. Most of the business is from one bank to another, or several others through a broker who matches orders. hence the term "inter-bank". If a bank wants to buy a certain currency then they will put a bid into the market and vice versa if they want to sell (or they will buy or sell at the market which will be quoted by their broker), as different banks will want to be buying or selling at the same time you end up with both a bid and an ask, this is what is quoted by your broker. However, some banks and brokers act as market makers so they will produce their own bid-ask prices at which they are willing to trade. In order to trade with the banks on the forex market you would need to be trading in the millions, so it is not really feasible for the private investor, so instead some forex brokers will allow you to trade small lots which they match with other orders in the market, sometimes smaller orders like yours or to help fill a large order from one of the banks. The spread fixing which you talk about is associated with brokers acting as market makers, the only way to avoid it is to trade with a broker who merely matches your order with other orders in the market and does not provide a price of their own. I don't know how easy or hard this is to find, but hopefully someone else can give you some links.

I hope I have helped, though as I said before, this is not my subject, so hope I haven't made too many mistakes (I'm sure others will correct me if I have).

 

[c6ackp]

Hi Olimits7

I'll try to fill in some gaps for you...

1. They are the large financial institutions like Nomura, Bear Stearns, Goldman Sachs, Morgan Stanley, HSBC, RBS, Chase, etc.

2. 3. As danfreek says it's the difference between retail and wholesale in any business - you need a huge account to trade in the big league.

4. I went to an FXCM seminar once and the speaker explained that, using GBP/USD as an example, they get a spread of 3 from the banks so they offer a 5 spread to their retail clients.

5. "bucket shops" is the correct term - they are out to make money and taking easy money from the public is the game, always has been and always will be. This doesn't mean, however, that these firms will just rip you off. They don't have time for that, they are too busy collecting the millions which hopeful punters are throwing at them.

"Stop hunting" can mean two things.

If a market is slow and trading in a range (perhaps when there are holidays in certain markets and not others), some volatility can be generated by the big firms dumping currency onto a weak market in order to trigger stop orders. It's not too difficult to predict where large volumes of stop are likely to be, especially just below a big number like 1.8750 or 1.9000, for example.

The other meaning is slightly more sinister but still, I believe, quite rare.

Because the retail shops are market makers they have liberty to quote any price they feel like. You see this sometimes in FX but it's more prevalent on the indices like the dow. Obviously the brokers don't want to make it any easier than they have to for you to win so (in my experience), they skew the price they are offering in the most likely direction of the next move. This effectively widens the spread from say 3 to 5/7/10 or sometimes more, making it more difficult to win intraday. They all do this - wouldn't you, if you controlled the price? This does mean that if you know how to exit with a profit then you gain from this skew. However, most don't so they win big time by manipulating the price slightly in this way.

Anyway, what can happen is that a scheduled news story may cause violent swings in price. This is when you sometimes see differences in highs/lows between brokers. So, if company A's price spikes 25 pips lower for a split second then they may "collect" a bunch of large stop orders for free. This can be called "stop hunting". I don't know whether they actually do this on purpose or whether their interbank partner genuinely gets a (momentary) bigger liquidity hit than the others.

If you are concerned about retail brokers trading against you then try the following site:

http://www.interactivebrokers.com

They don't take the other side of your trade, they simply match orders between traders.

5. The best thing you can do is find a platform that you like and which suits your style of trading. For example, if you want to scalp, then I wouldn't recommend a web based trading platform, you'll need something slick, fast and reliable like FXCM's software. Also, pick a firm which has good support. Capital Spreads have a good reputation for this and I've found FXCM and ACM very responsive also.

6. I don't know of a website which evaluates brokers - would be useful though

Hope this helps.

Steve