Do Banks Trade Forex?
The foreign exchange is the biggest financial market worldwide. It is accessed by banks, corporations, hedge funds, and retail traders.
Due to the sheer size or daily turnover (6+ trillion US dollars), it is clear that large players cannot stay away.
In fact, it is the central banks whose activity accounts for most of the volume.
Individuals should understand that the market they access is driven by bankers. For the latter, trading is more than a means of speculation.
They buy and sell currencies for different reasons. Here is an overview of their activities. Every trader should be aware of these fundamental principles of foreign exchange.
Beyond Speculation
First, here is how the thinking of multinational corporations goes. Their activities are connected to global trade. When they pay for imported goods or services, they need to exchange currencies.
In 2019, goods worth 19 trillion U.S. dollars were exported globally. On the other hand, there are banks. Let’s see why they partake in Forex trading.
Banks need to balance their holdings. It is particularly true for central banks — key national financial regulators. Assets are bought and sold all the time, so funds are constantly transferred between bank accounts.
Suppose an oil tycoon from Dubai decides to purchase stock in the United States with money that rests in his UK-based bank account.
This operation involves multiple banks that all need to balance their holdings of pounds and dollars.
Banks are the biggest players in this market. They are powerful enough to affect the value of currencies in circulation.
Individuals in Nigeria and abroad buy and sell currencies through a Forextime ECN trading account because they want to capitalize on the difference between entry and exit.
As all exchange rates are permanently in flux, speculation can be extremely profitable, particularly with highly volatile currency pairs.
Retail traders account for an infinitesimal fraction of the daily volume.
Most transactions take place between institutions. Speculation is not their primary motivation. Organizations resort to currency trades for different practical purposes.
It Is Because of the Rules
As per industry regulations, banks are obliged to retain a certain amount of assets at all times.
As currency rates are always changing, so does the value of those assets. As a result, the bank has to buy or sell currency to keep the balance.
In a way, it is similar to what happens when people go abroad. When tourists buy food or souvenirs using a credit card, they pay in the local currency. Every transaction launches a set of operations, which a few cardholders know.
For instance, if the currency of the card is US dollars, while the price is in euros, the conversion is automatic. In the case of exotics like the Turkish Lira, the amount may be first converted to a major currency and then to the local one.
As a result, a chain involving Visa/MasterCard, the bank, and sometimes even the Central Bank of the foreign country is activated. Their ultimate goal is to balance their holdings.
The Big Guys’ Club
In addition, banks trade on their clients’ behalf. At their request, they may buy or sell particular assets. If you check the offerings of any major bank, you may notice fx services.
However, this scheme is different from retail trading.
First, transaction volume must be relatively large for a bank to facilitate it. In many cases, the institution requires substantial initial deposits, which is out of the question for regular traders in Nigeria — particularly beginners.
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The presence of global brokerage brands is a blessing. These companies allow access to the largest financial market, but entry is immeasurably more affordable.
Some accounts may even be opened with just $10. In addition, education and demo trading are free.
What This Means for Retail Traders
If all traders had to deal with onerous banking standards, Forex would still be the domain of the chosen few.
Even though we can easily access it through brokers, banking operations still account for the largest share of the ten-digit volume.
Banks do not simply speculate on exchange rates. They respond to regulations and technical requirements. They have the power to affect currency rates.
Therefore, retail traders should understand the inner workings of the market.
It is thanks to banks that Forex is relatively logical. It is less susceptible to speculatory effects than other markets. On the other hand, as no individual can influence the rates, success boils down to diligent planning rather than any hidden tricks.
Forex is not a get-rich-quick scheme. It rewards those who can measure every step.