Who moves the market? forex question

[acertablet]

im talking about major traded fx pairs and some minor pair. not directed to exotics or those illiquid pairs. i am not expert in trading, but from what i understood is big institution, hedge fund, central bank, retail banks, etc is the primary reason market moves? does big institution inform each other which direction of market they will trade before entry?

2nd question is what is the purpose of central bank trading the market? do they have same goal like retail traders which is to make money?

3rd, it is understood where hedge fund, trading firm, commercial bank/institutional firm etc their primary interest of getting in the market is to make money. but ironically, if anyone ever ask where is the profit coming from, the answer would be somebody else losses? if this statement holds true. would it be fair to say, to make big profit, institution require to destroy the economy, such as war, deliberately release fake news, interfering with gov(this weaken country=means weak currency), staging a coup d’etat, overthrowing gov, devaluing currency so third world country getting poor, robbing off pensioner savings, charging high fee, etc u should get the idea

if my third paragraph holds true, would it be fair to say, those big institution can be grouped into 1 large entity or can call them as big organized mafia as their motive is the same? if yes, that means theyre primary mover of market and where to obtain the required info, so that retail trader able to trade the same direction as them

please feel free to correct me if my understanding above is false

 

[narafa]

im talking about major traded fx pairs and some minor pair. not directed to exotics or those illiquid pairs. i am not expert in trading, but from what i understood is big institution, hedge fund, central bank, retail banks, etc is the primary reason market moves? does big institution inform each other which direction of market they will trade before entry?

Yes, they used to do and it was revealed (Read this: https://en.wikipedia.org/wiki/Forex_scandal). It wasn't exactly that they were sharing the direction of the market or their order flow, they were organizing a coordinated fix for the WM/Reuters Spot rates. WM/Reuters fixes are considered the benchmarks when it comes to many things, settling option positions, option structures, MTM of outright positions, etc...

Are they still doing it, probably, no one knows, but as long as there is money involved, you will find people trying to get around the rules or game the system to their advantage.

2nd question is what is the purpose of central bank trading the market? do they have same goal like retail traders which is to make money?

Central Banks becomes a player in the FX market for some major macro-economic objectives/goals. They are usually concerned about their currency value against another major one (e.g. the USD), so they would intervene in the FX market as a buyer for their currency or as a seller based on what they foresee as achieving the best economic value inline with their objectives as a central bank.

For example, the BOJ (Bank of Japan) intervenes in the FX market as a Yen seller whenever they see the USD/JPY FX rate is approaching dangerous levels from their point of view, so they intervene in the market to sell the Yen and weaken it on the basis that this intervention helps Japanese corporations in gaining currency advantage for their exports. And so on.

3rd, it is understood where hedge fund, trading firm, commercial bank/institutional firm etc their primary interest of getting in the market is to make money. but ironically, if anyone ever ask where is the profit coming from, the answer would be somebody else losses? if this statement holds true. would it be fair to say, to make big profit, institution require to destroy the economy, such as war, deliberately release fake news, interfering with gov(this weaken country=means weak currency), staging a coup d’etat, overthrowing gov, devaluing currency so third world country getting poor, robbing off pensioner savings, charging high fee, etc u should get the idea

Not really. The market structure is not exactly as you mentioned. A big number of the players in the market are the Users/Producers of the currencies. Those actually don't care if they win or lose in the FX trade itself because they are not into the game for profits/losses. They are into the game as a way to secure their needs of certain currencies at fixed known prices, or the other way around, to convert their foreign currencies sales into local currency.

Those Users/Producers/Hedgers are mainly the corporates involved in local & international trade. Imagine Siemens buying some raw materials from an Australian company and agreed to pay for them in Australian Dollars. They need to buy AUD now against EUR to process that payment. Typically a corporate won't look much into the difference of 30 pips (But very large corproates do and they even have large FX desks like the banks do, but that's another story).

You would be mistaken if you think Hedge Funds and Banks are on the same side. Not at all. Hedge Funds are speculators, the Banks are Liquidity providers. Hedge Funds take risks, Banks try to avoid it as much as they can and make smaller profits on larger trades but without being exposed.

if my third paragraph holds true, would it be fair to say, those big institution can be grouped into 1 large entity or can call them as big organized mafia as their motive is the same? if yes, that means theyre primary mover of market and where to obtain the required info, so that retail trader able to trade the same direction as them

please feel free to correct me if my understanding above is false

Actually, for different reasons, one of the chatrooms the banks FX traders were in was called "The Mafia". It's between the Banks (Institutions with common interest in the market).

Again, you can't say that these guys are trying to manipulate the market & move it in a certain direction (Although sometimes, this can happen for short periods of time). The revealed scandel was only to manipulate/rig the WM/Reuters fixings, just like the previous scandel of manipulating/rigging the LIBORs and so on.

 

[Claud Frank]

This question has been interesting to me for a long time, thank you.

 

[Abbas Ali Khan]

its a very nice reply with lot of information. thanks narafa for your nice post.

 

[Little Whale]

Hedge funds are not necessarily only speculating. They use FX markets to offset currency risk to their global equities and fixed income exposed portfolios. Particularly quant funds. Generally speaking, hedge funds are not typically long only or directional only speculators in anything, but attempting (not always successfully) to build exposure to markets in ways that are hedged, have lower value at risk, for more consistent or higher gains. Of course the term hedge fund has become so malleable that maybe I'm being pedantic, but having worked in the space years ago, I don't think it's accurate way to depict them as FX market participants.

 

[acertablet]

Spoiler

Yes, they used to do and it was revealed (Read this: https://en.wikipedia.org/wiki/Forex_scandal). It wasn't exactly that they were sharing the direction of the market or their order flow, they were organizing a coordinated fix for the WM/Reuters Spot rates. WM/Reuters fixes are considered the benchmarks when it comes to many things, settling option positions, option structures, MTM of outright positions, etc...

Are they still doing it, probably, no one knows, but as long as there is money involved, you will find people trying to get around the rules or game the system to their advantage.



Central Banks becomes a player in the FX market for some major macro-economic objectives/goals. They are usually concerned about their currency value against another major one (e.g. the USD), so they would intervene in the FX market as a buyer for their currency or as a seller based on what they foresee as achieving the best economic value inline with their objectives as a central bank.

For example, the BOJ (Bank of Japan) intervenes in the FX market as a Yen seller whenever they see the USD/JPY FX rate is approaching dangerous levels from their point of view, so they intervene in the market to sell the Yen and weaken it on the basis that this intervention helps Japanese corporations in gaining currency advantage for their exports. And so on.



Not really. The market structure is not exactly as you mentioned. A big number of the players in the market are the Users/Producers of the currencies. Those actually don't care if they win or lose in the FX trade itself because they are not into the game for profits/losses. They are into the game as a way to secure their needs of certain currencies at fixed known prices, or the other way around, to convert their foreign currencies sales into local currency.

Those Users/Producers/Hedgers are mainly the corporates involved in local & international trade. Imagine Siemens buying some raw materials from an Australian company and agreed to pay for them in Australian Dollars. They need to buy AUD now against EUR to process that payment. Typically a corporate won't look much into the difference of 30 pips (But very large corproates do and they even have large FX desks like the banks do, but that's another story).

You would be mistaken if you think Hedge Funds and Banks are on the same side. Not at all. Hedge Funds are speculators, the Banks are Liquidity providers. Hedge Funds take risks, Banks try to avoid it as much as they can and make smaller profits on larger trades but without being exposed.



Actually, for different reasons, one of the chatrooms the banks FX traders were in was called "The Mafia". It's between the Banks (Institutions with common interest in the market).

Again, you can't say that these guys are trying to manipulate the market & move it in a certain direction (Although sometimes, this can happen for short periods of time). The revealed scandel was only to manipulate/rig the WM/Reuters fixings, just like the previous scandel of manipulating/rigging the LIBORs and so on.

Hi narafa, great post. after i done a bit of reading here and there, apparently there are some trader have conflicting opinions about who moves the market, what do you think?

who moves the market?

- interbank forex/big banks, global network utilized by financial institutions to trade currencies between themselves
- trade on behalf of large businesses, corporation
- Trading systems from Reuters and Bloomberg allow banks to trade billions of dollar at once
- 4-5 big banks controls over 50% of interbank thus ability to move the market price
- such as deutsche bank, citi, jp morgan chase, hsbc, possibly some china
- liquidity actually come from majority of the people's savings, as each of us/business having a bank account
- therefore it is assumed the big banks have endless liquidity supply to move market price
- banks can see where is all trader's position, such as 70% long, 30% short etc
- banks also can see where is your buy/sell limit orders, buy/sell stops orders, stop loss and take profit
- banks will trade the same direction as the minority trader, for eg: if 70% long, and 30% short. bank will go short, so that 70% long trader gets taken out
- it doesnt make sense for bank follow same direction as 70% of the trader, because bank themselves will be the one need to pay for the winnings of these 70% long trader
- so price will go against those 70% long trader until they give up and close the losing trade manually or hit their stop loss

by using IG Client sentiment, https://www.dailyfx.com/sentiment#view-more
for eg: if 70% short, and 30% long
bank will trade the same direction as minority, which is long. if you want to win, go long

- dont ever trade the news, because banks can move the price wherever they want during that time

all the description above is not my opinion, but i gathered from "nononsenseforex.com"
complete video here : https://www.youtube.com/watch?v=Lvq0t0eQOG4

 

[bindaytrader]

There are 6 big players that move the market i dont remember their names,but JP Morgan is one of them

 

[narafa]

Hedge funds are not necessarily only speculating. They use FX markets to offset currency risk to their global equities and fixed income exposed portfolios. Particularly quant funds. Generally speaking, hedge funds are not typically long only or directional only speculators in anything, but attempting (not always successfully) to build exposure to markets in ways that are hedged, have lower value at risk, for more consistent or higher gains. Of course the term hedge fund has become so malleable that maybe I'm being pedantic, but having worked in the space years ago, I don't think it's accurate way to depict them as FX market participants.

Agree, some hedge funds might use the FX market to protect their global portfolios & neutralize the effect of currency moves. It largely depend on the Hedge Fund strategy in the first place.

Some Hedge Funds are non-directional, some are quants, some are macro, some are pure directional, some are opportunistic, it all depends on their strategy and playbook. So their playbook defines if they will be speculators or Hedgers in the FX market.

 

[narafa]

Hi narafa, great post. after i done a bit of reading here and there, apparently there are some trader have conflicting opinions about who moves the market, what do you think?

who moves the market?

- interbank forex/big banks, global network utilized by financial institutions to trade currencies between themselves
- trade on behalf of large businesses, corporation
- Trading systems from Reuters and Bloomberg allow banks to trade billions of dollar at once
- 4-5 big banks controls over 50% of interbank thus ability to move the market price
- such as deutsche bank, citi, jp morgan chase, hsbc, possibly some china
- liquidity actually come from majority of the people's savings, as each of us/business having a bank account
- therefore it is assumed the big banks have endless liquidity supply to move market price
- banks can see where is all trader's position, such as 70% long, 30% short etc
- banks also can see where is your buy/sell limit orders, buy/sell stops orders, stop loss and take profit
- banks will trade the same direction as the minority trader, for eg: if 70% long, and 30% short. bank will go short, so that 70% long trader gets taken out
- it doesnt make sense for bank follow same direction as 70% of the trader, because bank themselves will be the one need to pay for the winnings of these 70% long trader
- so price will go against those 70% long trader until they give up and close the losing trade manually or hit their stop loss

by using IG Client sentiment, https://www.dailyfx.com/sentiment#view-more
for eg: if 70% short, and 30% long
bank will trade the same direction as minority, which is long. if you want to win, go long

- dont ever trade the news, because banks can move the price wherever they want during that time

all the description above is not my opinion, but i gathered from "nononsenseforex.com"
complete video here : https://www.youtube.com/watch?v=Lvq0t0eQOG4

Some points here seem valid, others not. It's true that a large portion of the FX liquidity is controlled by around 4-5 banks as mentioned (Citi, Deutsche, JP Morgan, UBS). These are the banks with the most connections to corporations, transacting with them for international trade and foreign currency conversions.

It's true that the big banks have a better visibility on order flow, but it's not really true that they monitor the retail positions in the market (As this is a very tiny portion of what's happening in the market). The banks will rarely take directional positions as they seek to profit from matching opposing order flows (Acting primarily as liquidity providers or market makers), thus profiting from the spreads.

On top of the spot FX desks, the derivatives desks in the banks create custom made structures (Using FX options, swaps and swaptions), sometimes worth hundreds of millions of dollars & sell them to corporates. Those structures act like selling naked or covered options, but they are much more complex as they might involve many legs spanning several months in the future and cannot really be exited as there is no market for them except to close them out with your counterparty. This is where the manipulation of the WM/Reuters fixing comes into place, as this WM/Reuters fixing is the basis for valuing those structures and determining if the structure would be a profit or a loss for the bank (And the corporate who bought that structure), hence the attempt to manipulate it as it makes or breaks billions of dollars in structured products the banks have in place.

 

[Raheel Shaikh]

Yes, they used to do and it was revealed (Read this: https://en.wikipedia.org/wiki/Forex_scandal). It wasn't exactly that they were sharing the direction of the market or their order flow, they were organizing a coordinated fix for the WM/Reuters Spot rates. WM/Reuters fixes are considered the benchmarks when it comes to many things, settling option positions, option structures, MTM of outright positions, etc...

Are they still doing it, probably, no one knows, but as long as there is money involved, you will find people trying to get around the rules or game the system to their advantage.



Central Banks becomes a player in the FX market for some major macro-economic objectives/goals. They are usually concerned about their currency value against another major one (e.g. the USD), so they would intervene in the FX market as a buyer for their currency or as a seller based on what they foresee as achieving the best economic value inline with their objectives as a central bank.

For example, the BOJ (Bank of Japan) intervenes in the FX market as a Yen seller whenever they see the USD/JPY FX rate is approaching dangerous levels from their point of view, so they intervene in the market to sell the Yen and weaken it on the basis that this intervention helps Japanese corporations in gaining currency advantage for their exports. And so on.



Not really. The market structure is not exactly as you mentioned. A big number of the players in the market are the Users/Producers of the currencies. Those actually don't care if they win or lose in the FX trade itself because they are not into the game for profits/losses. They are into the game as a way to secure their needs of certain currencies at fixed known prices, or the other way around, to convert their foreign currencies sales into local currency.

Those Users/Producers/Hedgers are mainly the corporates involved in local & international trade. Imagine Siemens buying some raw materials from an Australian company and agreed to pay for them in Australian Dollars. They need to buy AUD now against EUR to process that payment. Typically a corporate won't look much into the difference of 30 pips (But very large corproates do and they even have large FX desks like the banks do, but that's another story).

You would be mistaken if you think Hedge Funds and Banks are on the same side. Not at all. Hedge Funds are speculators, the Banks are Liquidity providers. Hedge Funds take risks, Banks try to avoid it as much as they can and make smaller profits on larger trades but without being exposed.



Actually, for different reasons, one of the chatrooms the banks FX traders were in was called "The Mafia". It's between the Banks (Institutions with common interest in the market).

Again, you can't say that these guys are trying to manipulate the market & move it in a certain direction (Although sometimes, this can happen for short periods of time). The revealed scandel was only to manipulate/rig the WM/Reuters fixings, just like the previous scandel of manipulating/rigging the LIBORs and so on.

well explained narafa

the retails together don't even contribute to 5% of the forex market
were just the small fishes in the big ocean