Does Retail S/D affect the interbank market?

The "interbank market" is called the "interbank market" presumably because it's where banks trade with each other. Assuming we have a reliable broker (A-Book / ECN / DMA etc), the price feed on our screen should be closely correlated to the true interbank market. When I place my order with my ECN broker does it ever make it to the interbank market? If my order was big enough, could it ever affect the price action on my screen? Or are ECN brokers connected to some liquidity pool of retail traders all betting on the price of derivatives going up and down, but unable to actually touch the true market?

Cheers!

If anyone cares the answer is no. Our orders don't affect price.

From what I read retail is atleast 1/4 of the spot market. I would say the "don't affect price" is part right and part wrong. The wrong part starts when whoever you sent your order to reacts to it and sends their own order to some other company - but only as reaction to your order. Maybe at some point depending on some factors it could end up having effect.

Depends on the broker, some broker promote that they're "true ECN" and will match your order with another in the market, when in reality they're not, just another bucketshop, but there are some brokers that will actually match your order in the real market, for example GlobalPrime claims that they "can provide a trade receipt on any trade taken which shows which bank/liquidity provider filled the trade."
So yeah, I guess retail orders make it to the interbank market.

You can read more in this thread, http://www.forexfactory.com/showthread.php?t=7484

hi fxjesus,

Retail traders are maximum 5% of the market, would rather say 1-2% (the total turnover of retail is higher than that, but only because of high frequency of trading most retail traders have - which has no impact on its "volume power")

Overall, even big speculators (hedge funds, real money, sell side traders) make up small portion of the total flow which creates a longer term trend (i.e. they are responsible for a lot of intraday volatility, but much less for the overall direction).

The real flow which moves the market over days / weeks / months is mostly global macro situation in those countries and real flows from Current & Capital accounts of given countries - exporters and importers, central banks, foreign direct investment (like M&A related stuff), portfolio flows (e.g. big pension fund or SWF buying chunk of bonds or equities in foreign currency), corporates managing their FX liabilities (can be extremely important at times), and many other things (even people's behaviour, like converting EUR deposits into FX because of negative deposit rates) like seasonal factors (end of month flows, e.g. exporters usually selling FX close to month-end, end of month portfolio rebalancing flows etc.) and dividend season.

Understanding all those things make short term trading much more successful in my experience.

I wonder though if when you take out all the arbitrage and hft, and look at the volumes of meaningful trades, whether retail might make up a more sizeable portion.Do you happen to know of any pdfs, books or websites where I can learn about the fundamentals which move a currency outside of direct trading in the forex market? Cheers!

Not if you're using a genuine broker who deals at interbank on your behalf.

I have no direct experience of this, myself, but was once told by an institutional trader that if a very large group of retail traders were all wanting to trade 200+ lots each at exactly the same time, in the same direction, it might briefly make a fraction of a pip difference.

If you're using a counterparty market-maker, of course, it's a whole different story, because their prices are their own (but nobody trading in size would be, would they?).

According to such sites as Wikipedia and Investopedia, "speculative trading" currently (2015) accounts for 80-90% of interbank volumes (according to whose figures you believe), though.

Have a look on the attached PDF...The eur/usd thread could be useful too.

http://www.forexfactory.com/showthread.php?t=409392

hi guys,

Inceptionist provided a decent paper on that.

One thing I would mention is the following:

It's basicaly what I mentioned regarding "volume power" in my previous post. Retail traders on average trade with very high frequency, let's say (just for example) on average 10 times a day, average size of 50 USD - that will give you the total volume of 500 USD but that's all comprised of maybe 5 buy and 5 sell orders & all @ 10 different prices. These trades pretty much net out during the day and have very little power in terms of moving the market compared to a corporate / pension fund / central bank which does 1-2 tickets a week which are usually large and one way.

I can't answer your main question with any authority, but you also ask about the interbank market . . . This doesn't just refer to banks, but to a variety of large liquidity providers, and a true ECN broker operates within the interbank market. So, if you're trading through an ECN you are trading in the interbank market. Someone above has provided an example of willing to provide details of how orders were filled.

As a further point, the fact that a broker isn't an ECN doesn't mean that your order couldn't theoretically affect market prices. Say you were to place a trade of Central Bank proportions through a "bucketshop" broker . . . You'd completely skew their books and they wouldn't be able to manage the risk in house; they'd hedge in the interbank market.

Of course, none of this has anything to do with whether retail orders actually impact on interbank prices in any significant fashion!