Bank to bank and beyond

The interbank market is a network of international banks operating in financial centers around the world. The banks maintain trading operations to facilitate speculation for their own accounts, called proprietary trading or just prop trading for short, and to provide currency trading services for their customers. Banks’customers can range from corporations and government agencies to hedge funds and wealthy private individuals.

Trading in the interbank market

The interbank market is an over-the-counter (OTC) market, which means that each trade is an agreement between the two counter parties to the trade. There are no exchanges or guarantors for the trades, just each bank's balance sheet and the promise to make payment.

The bulk of spot trading in the interbank market is transacted through electronic matching services, such as EBS and Reuters Dealing. Electronic matching services allow traders to enter their bids and offers into the market, hit bids (sell at the market), and pay offers (buy at the market). Price spreads vary by currency pair and change throughout the day depending on market interest and volatility.

The matching systems have pre-screened credit limits and a bank will only see prices available to it from approved counter parties. Pricing is anonymous before a deal, meaning you can’t tell which bank is offering or bidding, but the counter parties names are made known immediately alter a deal goes through.

The rest of interbank trading is done through currency brokers, referred to as voice brokers to differentiate them from the electronic ones. Traders can place bids and offers with these brokers the same as they do with the electronic matching services. Prior to the electronic matching services, voice brokers were the primary market intermediaries between the banks. 

Stepping onto a currency trading floor

Interbank trading rooms are staffed by a variety of different market professionals and each has a different role to play. The typical currency trading room has

• Flow traders: Sometimes called execution traders, these are the market makers, showing two-way prices at which to buy and sell, for the bank's customers. If the customer makes a trade, the execution trader then has to cover the resulting deal in the interbank market, hopefully at a profit. These traders are also responsible for watching and executing customer orders in the market. These are the traders who are generating most of the electronic prices and price action.

• Proprietary traders: Those traders are focused on speculative trading for the bank’s own account. Their strategies can run the gamut from short-term day trading to longer-term macroeconomic bets.

• Forward traders: Forward traders are active in the forward currency market, which refers to trades made beyond the normal spot value date. The forward market is essentially an interest rate differential market, where the interest rates of the various currencies are traded. These traders provide the bank‘s customers with pricing for non-spot deals or currency swap agreements. They also manage the bank's interest rate exposure in the various currencies.

• Options traders: Options traders manage the bank’s portfolio, or book, of outstanding currency options. They hedge the portfolio in the spot market. speculate for the bank‘s own account with option strategies, and provide pricing to the bank’s customers on requested option strategies.

• Sales staff: The sales staffs acts as the intermediary between the trading desk and the bank’s customers. They advise the banks customers on market flow, as well as who‘s buying and selling; recommend spot and option trading strategies; and execute trades between the bank and its customers.