How the Interbank works

For many years, the Interbank was inaccessible to retail traders because the minimum trade size and financial requirements were too onerous for individuals. However, as the interest in forex trading increased (thanks in large part to the Internet, which gave the Interbank a place to display its data), retail forex brokerages sprouted up, essentially becoming “market makers” for the Interbank firms.

In some cases, these brokerages display prices from multiple Interbank firms. However, unlike the equity world, these prices are not necessarily “firm,” meaning the price you see is not always the price you get.

In fact, since many of the brokerages are essentially acting as a middleman, they are paying the price shown on the screen and will execute the trade only after they have marked up the price so they can make a profit.

Alternately, they will have a large reserve and take the other side of the trade. In this instance, the brokerage is acting as the counter party, and their profit depends on how much of the spread they can earn. In fact, many (if not most) retail forex brokerage firms forego fixed commission charges in favor of assessing fees in the form of the spread traders will pay to get in and out of trades.

Most of the time retail forex traders are not actually participating in the actual Interbank market; they are trading with (or within) a forex brokerage firm that may (or may not) be trading with members of the Interbank system. In addition to typical retail forex brokerages, there are a handful of currency brokerages that tout themselves as “currency ECNs.” These firms attempt to mimic equity ECNs, where customer orders are executed against each other, eliminating the need to send them to an exchange. Currency ECNs promise that orders will be executed without any human intervention, although they need to rely on other groups — banks, other brokerages, institutions — besides their customer base to provide adequate liquidity.

Some of the banks are members of the Interbank, so from that standpoint, the ECN model doesn’t actually replace the Interbank — it merely makes it more accessible.