Institutional foreign exchange market participants include:
- Dealers
- Brokers
- Central banks
- Financial and corporate institutions
Foreign exchange is traded over-the-counter (OTC). It is operating worldwide, roundthe-
clock. A number of foreign exchange instruments, called Derivatives are traded on
exchanges. For traders, forex trading provides an alternative to stock market trading.
Dealers:
Dealers are financial institutions that buy and sell foreign exchange on behalf of their
clients, or even for themselves. Dealers act as one of the counterparties in a transaction,
committing their own capital. The dealer makes profit by finding another party and
closing out its position at a better price. Some dealers are market makers as they bid
and offer prices for one or more currencies and is ready to make a two-sided market for
its clients. In return for this service, the market maker seeks to earn a profit on the
difference between the bid and ask prices. (Bid price is the highest price any buyer is
willing to pay for a given currency at a given time. Offer price is the price at which
currency may be sold in the market. Ask price is the price that the dealer is willing to
pay from the seller of the currency). Foreign Exchange Dealer's Association of India (FEDAI) is an association of banks which deals in foreign exchange.
Broker:
A broker in the OTC FX (Over the Counter Forex) market serves as an intermediary
between two counterparties. The broker tries to unite a buyer and seller and earn a fee
for this service. Brokers do not take positions themselves or commit their own capital as
dealers do.
There are a large number of traders who fall under this category, which is essentially
small in amounts, but large in volume. They offer standard services, 24-hour online
currency trading, 100 to 1 leverage, commission free trading etc.
Electronic Brokerage System (EBS):
EBS is widely used for standardized transactions in the spot market (A market in which
transaction takes place on the spot and delivery immediately thereafter), especially
smaller trades involving the most common currency pairs. With electronic systems,
traders can see, on their computer screens, all bid and offer rates being offered by
acceptable counterparties. If a trader sees a bid or offer rate for an amount that it
accepts, the trader can then match the order and make the deal electronically. Back
office operations confirm the trade and generate the appropriate paperwork for both
parties to conclude the transaction.
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ReplyDeletethanks for given a defintion of a foreign exchange market.
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