Who is Behind the Screen?

[Tender 10]

I am interested in the mechanics of the forex market.

 

Questions every new trader should be asking:

What moves the the market? Yes, yes, I have heard all the pat answers. But they are all cliches. Does anyone really know? Where do those pretty lines and numbers come from? Yes, yes, I know they come from the liquidity provider. But where does the liquidity provider get them? He does not just make them up. Are there really people somewhere bidding and asking? Can I go there and watch them?

 

I am sure that the big banks, hedge fund managers, and financial institutions cause most of the activity. OK. So what are they trying to do? Are they acting or reacting? Are they watching the same charts I am? Are their motives different from mine? Are they trying to accomplish something more that just making a profit? Why would a trader care if the price went up or down? I certainly do not care. I quickly change sides whenever the trend changes. Often I have several open trades; some long, some short.

 

Can you give me an example of a trader who actively and aggressively wishes the price would go up or down? (Before he enters a trade, of course.)

 

Hmmm! I just watched a gap up of 40 pips. Who pushed the buttons to make that gap appear on my screen? Whoever it was, has a different trading platform than I do. I do not see any provision on my platform where I can create a gap up or down. I am assuming that a human created that gap, or am I trading against a computer? I have got to know who is on the other side of my computer screen.

 

Wow! I just saw the spread jump to 20 pips. Who decided that it ought to be that great? What is his name? Where does he live? Who gave him permission to widen the spread?

 

Are there really mystical bears fighting with a heard of bulls to lower the price of their favorite currency? Or is this just a myth like Santa Clause? Let's pretend there really are bulls and bears. My question is; why do they care? What are they fighting for? And if the bulls manage to raise the price a few pips, how did they do it? Until I understand why the bears are trying to drive prices down and why the bulls are frantically trying to elevate prices, I have no business in this battle. I will get killed in the cross fire. Any hope of success depends on some real answers, not just bull.

[ScottB 10]

Central banks and their proxies are often behind big moves or rather they are often the reason big moves end. In a macro economic sense there are a multitude of reasons why someone (such as a Central Bank) wants a currency in a certain band (range).

 

They want it for their exporters/importers, for political reasons, to keep promises made, to affect interest rates (and therefore their borrowing costs) and maybe even, just because they can (if you could move the markets, wouldn't that be cool enough to do it once in awhile just for fun).

 

The next tier of players know when the Central Banks are likely to rein in prices so they push them to that point and then fade the response.

 

There are also Merger and Acquisition money flows that can affect prices, hedging and a host of other legitimate reasons.

 

Scott

[deanz 10]

By the way price reacts around resistance levels (prolonged hounding of it.. etc) compared to how it reacts at support (bouncing before it get to it... etc), I believe someone has been buying the EUR/USD since early december, and that is the biggest pair in the biggest market as I understand, I'd guess they have well and truly brought out of their shorts and judging by the lack of downward progress they are now long. They have played in over a 600 pip range so far so that's what I believe small traders are up against. Although most will not believe someone has that deep a pockets, I think there is just too much money to be made to think price in not controllable.

 

.

[Rickey 10]

Some of the bigger players in the FX market include multinational corporations and investment institutions.

 

Say IBM wants to do business in Europe. They will need to make transactions in Euros. When they want to put those profits on the books they will need to exchange those Euros for dollars. Now they may only make that exchange a couple of times a year. So in the mean time they may hedge that exposure so they are not losing money to a depreciating exchange rate. This hedging will cause an imbalance in the supply/demand of the two currencies causing the market to adjust.

 

Investment institutions that buy bonds, for example, from another country will need to use the FX market to exchange their local currency for the currency of the country they are buying those bonds from. The capital inflow causes a supply/demand imbalance in the money supply of the two currencies causing one to rise vs the other.

 

Take last years bear market in the Euro as an example of investment institutions selling there European bonds (among other assets) because of the uncertainty of the Eurozones ability to repay their debt. They sold those assets in a local market receiving the local currency (Euros) in exchange. They then needed to exchange those Euros for their local currencies, say dollars for US institutions.

 

These are just to simplistic causes of exchange rate changes in a the complex FX market.

[laurus12 10]

Three informative and interesting replies in a row ScottB, Deanz, and Rickey, so I have to thank all three of you.

 

Laurus

[jolee 10]

I heard the cash FX market don't have a centralized clearing house and the courts stated that their bid/ask prices are "pretend" or make believe. So was advised not to trade cash FX but to only trade the futures currency market. Is this correct advice?

 

Where do the central banks, giant corporations , hedge fund, fund managers etc. go to trade currency?

 

 

Thanks in advance

[laurus12 10]

I heard the cash FX market don't have a centralized clearing house and the courts stated that their bid/ask prices are "pretend" or make believe. So was advised not to trade cash FX but to only trade the futures currency market. Is this correct advice?

 

Where do the central banks, giant corporations , hedge fund, fund managers etc. go to trade currency?

 

 

Thanks in advance

 

Hello jolee. It's known that spot forex is not centralized, because it goes over the interbank market. So regarding accurate volume you should definitely trade the futures. The downside of it is the lack of good liquidity in many currency futures products.

 

My personal question is if the "composite operator(s)" in the fx market have made it so that they are able so to see volume information that the rest of the market is cut off from. I suspect so. That is, since all markets works after the same principles. For example when Soros back in 1994 saw weakness in the Pound before his team crashed it, did they see it because of the "RSI overbought over 70" joke where it crossed down under it again, or through the news? Do not think so. The closest thing I know of for "top money" is ICAP EBS. If there is additional information that "top money" get from ICAP I do not know, but I know they use tick count volume from ICAP EBS which is highly correlated with acctual volume. You can open an account with brokers like London Capital Group and trade positions of minimum 1 million with ICAP EBS. Minimum account opening is $50,000. In addition there is probably solutions from Reuters and Bloomberg which the "top money" are also using. The next best thing I know of regarding tick volume for us retailers is eSignals GTIS which is unfiltered, but for the sake of information not very good to trade from, because of the volatile price fluctuations. On the other side good to have for tick count volume and if you want to check out if your fx broker are giving you some fake price moves, and/or for better stop loss management.

 

Could you please give us a link to "courts stated that their bid/ask prices are "pretend" or make believe"?

 

Thanks,

Laurus

Edited January 18, 2011 by laurus12

[Kiwi 16]

When considering the volume of the fx futures markets one might do well to ask "are major players operating in both markets?" and if the answer is yes then "could they manipulate volume in the smaller futures market to gain advantage in and fx market?"

[ScottB 10]

The volume in the futures market can be used as a proxy for the cash (i.e. 6E futures EUR/USD cash). But it appears there is an assumption in all this that is not correct in my experience.

 

The arb players are not going to get the cash vs. the futures get out of alignment, nor are they going to let any sort of misalignment of the cash go for more than a couple of seconds.

 

If you could buy some oil with dollars, then trade the oil for gold and then sell the gold for more dollars than you started with, wouldn't you do that all day long?

 

Well, that is what currency arbitrage is; buy and sell the pairs and crosses in a circular fashion as long as it meets the criteria above - EUR/USD -> EUR/JPY -> USD/JPY.

 

There are a huge number of issues surrounding the fx market but in the end, if you are on the right side of the trade, you will make money.

 

Scott

[SIUYA 11]

The FX market is made up of more players than you could imagine.

not only are there retail players, companies hedging exposures, governments and central banks, people remitting money back to their own countries (think of Indian/Chinese/Phillipino workers sending money back from where they work to their home countries), travellers, traders and speculators, funds hedging.

 

When it comes to FX it is ALL a relative bet. You dont buy shares in a company that may have earnings, you dont buy physical assets such as gold, oil, land. The only underlying thing is trust in the piece of paper that is the currency, and that you think it will rise relative to another.

 

When it came to Mr Soros, people forget, the idea to short the GBP was formulated well before it was implemented, his sidekick - Drunkenmiller from memory was the one who put the trade on, and George basically went for the kill..... at the time they were the market for a short period.

 

Ultimately....Scott says it best

"There are a huge number of issues surrounding the fx market but in the end, if you are on the right side of the trade, you will make money."

[jolee 10]

Could you please give us a link to "courts stated that their bid/ask prices are "pretend" or make believe"?

 

Thanks,

Laurus

 

I'm sorry I don't have the link and I can't remember how I got to the video showing the court documents - but I'm sure it's from that Heitkoetter chap from Rockwell Trading who had used the video to evidence and explain why he doesn't trade the cash forex.

[doubletop11 10]

(referral URL removed)

 

Basically when it comes down to it. If its spot fx it's not regulated by the US NFA and CFTC agencies therefore they have been know to take advantage of traders. Because they are not regulated, when you trade you are basically hedging a bid against your broker.

 

For tax reasons as well spot FX would work against a US trader because then you can't apply for traders tax rates.

[SIUYA 11]

as an aside.....

what are the currency futures actually based on?

the spot price.

 

So given that, wouldn't the most important thing if you are worried about crappy/real/imagined prices is the integrity of the broker you are using.

[MightyMouse 12]

Hello jolee. It's known that spot forex is not centralized, because it goes over the interbank market. So regarding accurate volume you should definitely trade the futures. The downside of it is the lack of good liquidity in many currency futures products.

 

My personal question is if the "composite operator(s)" in the fx market have made it so that they are able so to see volume information that the rest of the market is cut off from. I suspect so. That is, since all markets works after the same principles. For example when Soros back in 1994 saw weakness in the Pound before his team crashed it, did they see it because of the "RSI overbought over 70" joke where it crossed down under it again, or through the news? Do not think so. The closest thing I know of for "top money" is ICAP EBS. If there is additional information that "top money" get from ICAP I do not know, but I know they use tick count volume from ICAP EBS which is highly correlated with acctual volume. You can open an account with brokers like London Capital Group and trade positions of minimum 1 million with ICAP EBS. Minimum account opening is $50,000. In addition there is probably solutions from Reuters and Bloomberg which the "top money" are also using. The next best thing I know of regarding tick volume for us retailers is eSignals GTIS which is unfiltered, but for the sake of information not very good to trade from, because of the volatile price fluctuations. On the other side good to have for tick count volume and if you want to check out if your fx broker are giving you some fake price moves, and/or for better stop loss management.

 

Could you please give us a link to "courts stated that their bid/ask prices are "pretend" or make believe"?

 

Thanks,

Laurus

 

I am pretty sure that Soros used the fib retracement of the darvas box after the stochastic oscillator crossed over the woody cci index indicating that the heiken ashi 3 line break tested support and failed. Or, it may have been that he thought the BOE would fail at their efforts.

[ScottB 10]

I am pretty sure that Soros used the fib retracement of the darvas box after the stochastic oscillator crossed over the woody cci index indicating that the heiken ashi 3 line break tested support and failed. Or, it may have been that he thought the BOE would fail at their efforts.

 

ROFLMAO - perfect description of the trade!

[laurus12 10]

I'm sorry I don't have the link and I can't remember how I got to the video showing the court documents - but I'm sure it's from that Heitkoetter chap from Rockwell Trading who had used the video to evidence and explain why he doesn't trade the cash forex.

 

Thank you Jolee, I'll try to find it with the info you provided.

[jeremymullins79 10]

Well the FX market is a great choice as long as you opt for currency and not physical assets. The FX is the leader hands down.