Unlike a stock market, where it is required that all participants have access to the same prices, the foreign exchange market has been divided into levels of access. The inter-bank market is at the top, which is constituted of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and often the players outside the inner circle do not know about them.
The difference that is present in between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This happens due to volume. If a trader can provide a guarantee of large numbers of transactions for large amounts, then they can possibly demand a smaller difference between the bid and ask price, and it is known as a better spread. The size of the “line” i.e. the amount of money with which they are trading, determine the levels of access that make up the foreign exchange market. The top-tier inter-bank market accounts for 53% of all transactions. After that often there are smaller investment banks, that are followed by large multi-national corporations, large hedge funds, and even some of the retail FX-metal market makers.
Banks
Every day both the majority of commercial turnover and large amounts of speculative trading is provided by the interbank market. Daily billions of dollars are being traded by a large bank. On behalf of customers some of this trading is undertaken, but much is conducted by proprietary desks, trading for the bank’s own account. Nowadays, however, much of this business has moved on to more efficient electronic systems.
