May 24, 2016

Liquidity (Liquidity Provider)

What is liquidity?

Liquidity is the extent to which a financial instrument can be bought or sold with minimal or no effect to its price.

Liquidity also refers to the ability of a market to accept large transactions.

Who are the liquidity provider and major market participants in Forex market?

First of all, it must be said that in the foreign exchange market there are different types of participants.

Central banks, commercial banks, investment funds, financial offices, brokerage houses and individual traders.

Each party is interested in is to buy cheap and sell more expensive, but each party has its own main function, which he performs in the market.

1. Commercial banks

For the main function of commercial banks participating in the currency trade – is to ensure the liquidity of its own funds and execution of client applications, such as requests of importers and exporters.

Enterprises located in a single economic zone and are interested in products or raw materials produced in other economic areas, will be forced to exchange their national currency to the currency of the country where these goods are produced.

Exchanging money (converts) are conducting their commercial banks.

Volume of converse operations is significant and can last up to 2 / 3 of all daily operations in the FOREX.

This is, of course, also leads to changes in exchange rates since the supply of and demand for different currencies are in constant change.

Ultimately, the foreign exchange market is a market for interbank transactions, and, thereafter, on motion of exchange rates and interest rates, one should bear in mind the interbank foreign exchange market.

On world currency markets, the most influenced by the major international banks, the daily volume of transactions reaches billions of dollars.

These banks, like Deutsche Bank, Barclays Bank, Union Bank of Switzerland, Citibank, Chase Manhattan Bank, Standard Chartered Bank and others.

Their main difference is the large volume of transactions that may lead to a significant change in the quotation or the price of the currency. Typically, major players are divided into bulls and bears.

Bulls – it is market participants who are interested in enhancing the value of the currency; bears – that market participants who are interested in lowering the value of the currency.

Typically, the market is in a state of equilibrium between the bulls and bears, and the difference of quotations of currencies fluctuate in a fairly narrow limits.

However, when bulls or bears “take up”, quotes, exchange rates are changing quite dramatically and significantly.

2. Companies engaged in foreign trade operations

Companies participating in international trade, have a strong demand for foreign currency (as importers) and supply of foreign currency (exporters), as well as place and are free foreign exchange balances in short-term deposits.

In doing so, these organizations direct access to the foreign exchange market, as a rule, do not have, and carries out conversion and deposit transactions via commercial banks.

3. Companies engaged in foreign investments of assets (Investment Funds, Money Market Funds, International Corporations)

These companies provided different kinds of international investment funds, implement a policy of diversified management of portfolio assets by placing funds in securities of governments and corporations of different countries.

At the dealer’s slang they call a fund or funds; best known fund “Quantum” George Soros, the successful carrying out foreign exchange speculation, and the fund “Dean Witter”.

For this type of firms are also major international corporations engaged in foreign manufacturing investment: the creation of subsidiaries, joint ventures, etc., such as, for example, Xerox, Nestle, General Motors, British Petroleum and others.

4. Central banks

Their main task is to regulate currency in the foreign market – namely, preventing the spike in rates of national currencies, to prevent the economic crisis, maintaining the balance of exports and imports, etc.

Central banks have a direct impact on the currency market.

Their influence can be either direct – in the form of currency intervention, and indirectly – through the regulation of the money supply and interest rates.

They can not be assigned to the bulls or the bears, because they can play as an increase or decrease based on the specific challenges facing them at this time.

Brokers can act in the market alone to influence the national currency, or in concert with other Central Bank to conduct a joint monetary policy in the international market or for joint interventions.

The biggest influence on world currency markets are: the U.S. central bank – the Federal Reserve System (US Federal Reserve or a brief FED), the central bank of Germany – Bundesbank (Deutsche Bundesbank) and the UK – Bank of England (Bank of England, also called the Old Lady).

5. Currency Exchange

In some countries with transitional economies there are exchange markets, responsible for the exchange rates for businesses and market-based exchange rate.

The state usually regulates the level of active exchange rate, using a compact stock market.

6. Foreign exchange brokerage firm

Their duties include bringing the buyer and seller of foreign exchange and conversion between them, or credit-deposit operations.

During his brokerage brokerage firms charge a broker’s fee as a percentage of the amount of the transaction.

7. Private individuals

Individuals who hold a wide range of non-trade transactions in foreign tourism, remittances, pensions, royalties, buying and selling hard currency.

And in 1986 with the introduction of trade marginal individuals were able to free funds to invest in the FOREX market with a view to profit.

The main volume (90-95%) in the FOREX market makes the world’s largest commercial banks, making a conversion operation in the interests of their clients, and at his own expense.

Nevertheless, advances in computer technology have allowed in this area and find the area of finance applications for funds are often private and small investors.

A growing number of brokerage firms and banks provide access to private investors in the FOREX market through the Internet.

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