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The Interbank Market

When trading forex, you are participating within the interbank market as opposed to a centralized exchange (like the New York Stock Exchange). The interbank market is a global network of banks and liquidity providers that exchange very large amounts of currencies.

When you place a buy or sell order, it does not go directly into the interbank market. Instead it goes through an intermediary, also known as your broker/dealer.

Your broker/dealer collects all the buy / sell orders from their clients, and then flips them on the interbank market as one large order. The broker dealer makes a spread in this process since they mark up the bid/ask spread on their platform compared to what they pay on the interbank market.

The broker/dealer does not do this with ALL of their orders though. Only a portion, while the other portion they don’t bother to hedge. You know why? They are willing to bet that their clients are wrong, and keep the money that their clients lose. Especially since clients use margin and lose a lot more than they would if they were not leveraged at all.

Goldman Sachs is the type of bank that makes a market in the interbank network, while your broker/dealer is just a participant looking for liquidity (orders to be filled). They are not timing trades, instead they are capitalizing on a much higher probability opportunity: the ignorance of their customers.

Note:”No Dealing Desk” brokers claim to not trade against their customer accounts. Often this description is just an advertising loop hole, if you read the fine print, they basically take the other side of the trade.

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