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Foreign exchange: Its impact and contribution
In the arena of the stock market, all the participants have the same access to the prices whereas the market of the foreign exchange is alienated into the various levels of access. First of all, there is the inter-bank market that poses the banking firms with largest investment.
Within the market of the inter-bank, there is the difference in the ask price and bid price. It is very accurate in nature and is mostly unavailable to the participants outside the inner circle.
The gap between the prices of “bid and ask” ranges from 0-1 and 1-2 pip. This is all due to the volume of the market. If any trader which guarantees the large quantity of transactions for large sum, then they has the ability to demand a lesser difference between the prices of bid and ask which in turn can be referred as the better spread.
The access levels that create up the market of the foreign exchange are mostly defined with the size of "line" (the sum of money by which the trading is started). The top-tier market of the inter bank accounts for the rate of 53% of all related transactions.
Then there are the banks with smaller investment, followed by the bulk corporation of the multi-national (which required to pay the employees and hedge risk in various countries), bulk hedge funds and even many of the retail foreign exchange-metal market producers.
According to the analysis of “insurance companies, mutual funds, pension funds, and other establishment, investors have played an important role in increasing the financial markets. In addition, it was also noted that the “funds of hedge have increased markedly over the period of 2001–2004 in terms of both overall size and the number. Also the Central banks participate in the market of foreign exchange to align the currencies to meet their economic requirements.
In the market makers, the spot prices may vary, but on USD/EUR are mostly no more than the 3 pips extensive (i.e., 0.0003). The competition is deeply increased with the larger transactions. The market of the inter bank caters for both the bulk amount of tentative trading and majority of the commercial turnover every day.
There can be a trade of billions of dollars in a large bank. Many of such trading is mostly carried out on behalf of the customers but much is dealt by proprietary desks that trade for the bank's own account. Until recently brokers of the foreign exchange done bulk amounts of commerce facilitating the trading of inter bank and matching unidentified counterparts. It was all for very small fees. But presently much of such business has transferred on to more efficient and speedy electronic systems.
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