Commerce by brokers
Table of Contents
The brokers of the currency market don’t find self positions but only work with banks. Their part is:
- To meet the seller and the buyer on the market
- To optimize the price given by the clients
- Operative, exactly and fairly to make the request of the trader
Most of the currency brokers lead their business from the phone. The telephone lines between the brokers and the banks are separated or direct and usually are installed to the broker for free. The currency broker firm has straight lines so they connect to the banks all over the world. Most of the currency operations are made by the “open box system” which is a microphone placed in front of the broker and translate everything that he or she speaks on the direct line on his work place in the bank. Thanks to this the banks know about every deal that is made. Thanks to this “open box system” the trader knows the announced prices for purchases and sales and on what prices they are made. What the trader couldn’t be able to know is the capacity of the purchases and sales and the names of the banks announced the prices. The prices are anonymous. The anonymous of the banks dealing on the market secures the effectiveness of the market as long as all the banks take place in the commerce on the same clauses.
The brokers take commissions which are paid by the sellers or the buyers. The size of the commission is not fixed and it is announced by the bank for every broker firm.
The brokers announce to their customers the prices of other clients or from two-way buying and selling or from one-way buying or selling. The traders announce different prices because they “read” the market differently they have different names and different interests. A broker who has more than one price more than one or two sides, he automatically optimizes it. Said in different way the broker always will show the highest bid for the client and the lowest price for an offer. By this way the market secures the minimum able spread between these prices.
For prognosticate of the moving of the prices is used fundamental and technical analysis. The trader has opportunity to check the market making a buying for not much money and to see if it makes a reaction. Of course the trader isn’t responsible if the rearrangement of the positions longs for a longer time than it is expected.
Other advantage of the broker market is that the broker has opportunity to secure for the client bigger choice of banks. Some European and Asian banks work in the nights so the incoming requests can be transferred to the brokers connected to the American banks which raise the liquid of the market.
The direct dealing is based on the commerce mutuality. The participant on the currency market – a bank, establishing a price, thinks that the bank that has turned to it will reply with mutuality, establishing its own price, when they turn to the bank. The direct dealing gives bigger freedom of actions of the commerce than the dealing of the broker market. Some times traders get some advantages of this. The direct dealing before was made mainly on the phone. This way of work was hard to find the mistakes and harder to get rid of them. For rising the level of security of the dealing many banks eavesdrop on telephone lines used for deals. This was useful because it allowed to record the details of all deals and allows to traders to find out the culprit for the mistakes that was made. Having of technique for recording didn’t remove the commerce mistakes. The direct dealing is changed for ever in the 1980s by starting of usage of dealing systems.
The dealing systems are computers working in Internet connecting the banks that participate all over the world by given of each one of them personal terminal.
The dealing systems differ with speed, hopeful and safety. To connect to a bank using dealing system is possible faster than using the phone. The dealing systems are getting more secure. Program security is much trustful when apprehending of long numbers of exchange rates and standard values. Apart of that it secures the speed of establishing of connection between the partners, including of partners and using of database.
The trader is in permanent visual contact with the information changing on the monitor. It is more comfortable this information to be seen than to be heard during the switches, during the conversations.
Many banks use combine services of brokers and dealing systems. Both methods are used by the same banks but not on the same market. The traders set on the market personal connections with the brokers and with other traders but choose moderators looking at the prices not on personal sympathies. That’s why separating of the market of sections between the dealing systems and the brokers are hesitating according to the market conditions. For fast changing conditions the dealing systems are useful but in normal conditions brokers are better to be used.
Federal Reserve System of USA
As the other central banks, the Federal Reserve System of USA gives pressure on the currency market using traditional methods.
- Using changing of stake under review
- Using tools of the financial market
- Using currency operations
As long as it depends on the currency operations most efficient are the deals for repurchase agreement foreseeing the back sale of the system of the same bought earlier by the clients’ currency on the same price in set time in the future and with exact percent stake. The capacity of the deals on such agreement is equal to the capacity of the timing influence of reserves in the bank system. The influence of the currency market is made by this – to make the dollar as weak as possible. The repurchase agreement can give more duties for the client and for the system. Matched sale-purchase agreement is opposite to the repurchase agreement. Making a matched sale-purchase agreement the Federal system sell currency for its exact delivery to the dealer or the international central bank agreeing to buy back this currency on the same price in future usually in 7 days. This typo of contract is directed to temporary lowing of the reserves. The capacity of the deals in such agreement is equal to the capacity of the temporary lowing of the reserves. The influence of the market is directed to this the dollar to be made stronger. Many central banks work on the currency market with many methods even only because of the intervention of the open market. To the number of their operations are taken placing money in other central banks or international agencies. Apart of that the Federal Reserve System work since 1962 it has made many agreements with other central banks for currency exchange. For instance for giving help of the allies during the war against the occupation of Kuveit and Iraq in 1990-1991 Bundes bank and the Japanese bank import money in the Federal system. Using other central banks American payments are made in the World Bank.
Interventions on the currency market by the treasury and the Federal reserve of USA are pointed to secure the market or to regulate the exchange rates. They are not set to influence on the statement of the financial reserves.
Two kinds of currency interventions are known: naked and sterilized.
The naked intervention is connected with the currency commerce. Everything that happens is a purchase or sale of dollars by the federal system for international currency. Changing of the financial streams is making to correct the size of the payments by dividends. Changing of the prices and inserting of other corrections of all levels of the economic. That’s why the influence of the naked currency intervention is long-termed.
Central banks of the other countries of the big seven
European Central Bank (ECB) was started on 1.06.1988 for leading the Euro. In the period of preparing for the third part of making of the economical and financial union going in circulation of European currency since 01.01.1999 respond for the financial politic of the EU. ECB is independent juridical person. It leads the work of its members like Bundesbank, Banque de France and Ufficio Italiano dei Cambi. The organs of ECB manage European system of the central banks which work is to control money in circulation, to make currency operations, making and managing of currency reserves of the countries participating in the Union and securing of normal function of the stake of European Financial Institution (EFI).
The consequences of World War II using the mechanism of the acceptation helped to Germany and Japan to create new financial systems. These two countries create central banks that are the same as the Federal Reserve System. Time by time their functions are reduced to satisfying of the inside need and these banks became very different from the Federal Reserve System.
The central bank of Germany known as Bundesbank is made by the model of ECB. Bundesbank was absolutely independent department which work was to secure the stability of the money, to low down the inflation level and to rule the money streams. Super inflation developed in Germany after the World War I prepares good economical and political conditions for starting of the fascism and for the beginning of World War II. According to its rules Bundesbank is obliged to prevent such economical chaos again.
The Bank of Japan starts its development from the model of the Federal Reserve System as independent department. In spite of its management system has full responsibility for the financial politic, suggested changes have to be confirmed by the Ministry of finances. The bank publishes economical survey called “Tankan” analogically to the American “brown book” showing the state of the economic. The content of the Tankan doesn’t lead to automatically change in the financial politic. Not enough liberty of the central bank raises the inflation. In some cases this is not about Japan but after all there are other examples for that how these or that methods for making of the financial and economical politic can bring to negative results in different situations.
The bank of England is less independent central bank because the government can reject its decisions. The history of this bank is long. After all in spite of that the inflation level in Great Britain remains high until 1991 when it becomes lower during the 1990s. The Bank of England manage to prove to the whole world that it is capable to manage the movement of the pound, repeating the action of the Exchanging currency mechanism (ECM)
After joining the ECM in the end of the 1990s the bank shows master in keeping the pound in the allowed percent level toward German mark in spite of the participating of the pound in ECM for a short time. The contradictions between artificial keeping the stake under review of the participants in ECM high and the weakness of the British economic cause massive sale of the pound in September 1992.
The bank of France has common responsibility with the ministry of the finances in making of inside financial politic. Its main purposes are fighting the stature of the inflation and watching the international duties. France is in the number of the main participants on the currency market after the crisis of ECM in July 1993 when the French franc became victim of the events of this market.
The bank of Italy makes financial politic, financial mediation and currency operations. Like other central banks of the formal European monetary system the central bank of Italy changes it’s inside tasks after the crisis of ECM. Together with Bundesbank and the bank of France, The bank of Italy is now part of the European system of the central banks.
The bank of Canada is independent central bank that is managing its currency successfully. Thanks to the economical relationships between Canada and USA the Canadian dollar is connected to the American. The bank of Canada more often than other central banks of the countries of Big seven makes interventions for keeping up the Canadian dollar. The bank changed its interventional politic in 1999 after it found out that the used earlier mechanical reception of interventions in size of million American dollars on hard price since the last closing didn’t gave results that were expected.
Market of available currency
Commerce with available currency is the most popular tool all over the world for currency operations, taking 57% of the general commerce capacity.
Fast working market of available currency (MAC) is for handy traders because it is volatility and profitable. The deal on MAC is signing a two-way contract in which one of the sides gives some quantity of some currency and the other side gives another quantity of other currency calculated on specified exchange rate.
Available currency doesn’t mean that the currency operation is made on the same day when the deal is made. The currency operations that have to transfer currency on the same day are called cash transactions. Two-day-term for transfer of currency was settled long before the technological innovations.
This term was necessary for clearing of all the details about the deal. Being perfect in technological way modern markets couldn’t find opportunity to low down the time given for the stakes. Even by this moment mistakes has been made by the executors that have to be reviewed until the end of the stake.
According to the capacity of the deals the currency all over the world is trade generally for American dollars because it is basic currency. Other main currencies are the Euro, after the Euro comes the Japanese yen, the British pound, and the Swiss franc. Other currencies that take big sized section on MAC are the Canadian and Australian dollar. Apart from that the section of the currency exchange rate of the non-dollars tools using of which the international currencies are valued in other currencies like Euro in Japanese yens.
There are some reasons for the popularity of the MAC. The profits of this market are realized fast thanks to its volatility. Apart from that because the term for execution of the contract on this market is just 2 days the time for operation of the credit risk is limited. The turnover of MAC is growing up real fast thanks to the combination between its own profitable and the low credit risk.
MAC is with high liquid and high volatility. The volatility is the measure of inclination of the currency to reach exact frequency of hesitation of the price for definite time. The floating currencies like Euro and Japanese yen has tendencies to volatility to the American dollar.
During the world day of commerce the exchange rate Euro – Dollar can change 18 000 times. The rate can rise up with 200 points for a few seconds if the market is under the pressure of a sensational new. The rate can remain practically unchanged for a long time even for hours if the commerce of one market is almost over and it is expected an auction. Such situation is normal for the day of commerce in New York. California didn’t succeed in creating a connection between the markets in New York and Tokyo there is a place for technical commerce window between 4.30 and 6h. On MAC of USA most of the deals are made between 8 o’clock in the morning and noon when the times of New York and European markets match. The activity of the market is getting low practically on 50% when in New York the international support is missing. The night commerce is restricted because few banks have night shifts. Most of the banks send the night requests to another bank that is working in another time zone.
General participants in MAC are the commercial and the investment banks after that the insurance companies and the corporative clients. The market between the banks where most of the deals are made reflects the global character of the currency operations inside the country or to trade using international banks working in this time zone. In spite of the growing activity of the insurance companies and the corporative clients’ main commerce power on the currency market remain the banks.
After all of course important is the result of all financial markets in spite of the commerce of MAC always looks more profitable as big as the demand of available currency exist all over the world.
Profits and looses can be realized and unrealized. The realized profit or loose – this is sum fixed on closed positions. Unrealized profit or loose – this is a sum that will nearly create existing position if it closes on current rate.
Market of the currency forwards
On the market of forwards are used two tools – forward outright deal and swaps.
The swap is untypical tool of the currency commerce as long as it is made by two deals or legs. All other deals on the currency market run in one leg. In his prototype the swap is combination of deals on the market of the available currency and the forward outright deals (FOD). As rule on the market are made only available deals. That’s why in spite of the future currency contracts is special kind of FOD they are checked separated.
Like the database published by the Bank for international agreements the part of the forward deals in 1988 is 57% of the currency market. Calculated in American dollars from the daily profits of the currency market which is 1.46 billion dollars on the market of forwards the profit is 900 milliard dollars.
On the market of forwards doesn’t exist norms on terms of execution of agreements which are from 3 days to 3 years. The capacity of deals by swap made in more than a year usually isn’t big although the technical point of view doesn’t have obstacles for such deals. Every deal which term is more than the terms of FOD may be forward agreement but only if the said in the agreement for these 2 deals term is the commerce day.
The market of forwards is decentralized and its participants all over the world despite the kind of deals can work or directly with each other or with broker. The market of the currency features is centralized and all deals are made on the trading floor.
On the market of forwards is able all kind of trade with all kinds of currency in all kind of capacity and by the same time on the features market not big number of currencies can be trade in bigger or standard capacities. Forward price contains 2 general parts – exchange rate and forward spread. The general part is to the exchange rate as long as the forward price is made by the spot price and the forward spread the unpreventable forward deals and the swaps are changing into forward points. Forward spread is needed to co-ordinate the spot price with the state of the announced in the forward contract date different from the date of the exchange deal. So the term is another factor that influence onto setting of the forward price as to FOD the left side of the quote is “bid” and the right side is “ask” or “offer”.