Part 2 - Trade the FX Market
Chapter 4 - Understand Market Structure
The Players
I’ll try to be as brief as possible where we’ve already talked about some of this before in other books.
I know that XTX share has been going up annually and it may be the largest now.
Chapter 4 - Understand Market Structure
The Players
I’ll try to be as brief as possible where we’ve already talked about some of this before in other books.
- Banks - big banks
- Interbank market - trading between banks
- Price discovery happens here
- Bank traders are market makers who take directional risk anticipating client flow
Attached Image
I know that XTX share has been going up annually and it may be the largest now.
- Corporations and hedgers
- Big companies need to buy and sell currency daily
- There are many reasons why - for ex. Exporter selling goods to a foreign buyer
- Cross-border M&A
- Corporates are ‘more methodical and less active’
- Hedge funds
- Searching for speculative profits
- Discretionary/macro funds - try to forecast trends and movements
- Short-term hedge funds with a macro approach are known as ‘fast money’
- Commodity Trading Advisers, systematic and model funds
- Hedge funds that trade with algos, pattern recognition, correlation
- Their activity has eroded the performance of trend-following models
- Real money
- Trading FX against an underlying asset
- Example of a US bond fund buying 2B EUR worth of Greek bonds; their cash balance is in USD but they need to pay for the bonds with EUR so the real-money client calls a bank, buys 2B EUR and sells USD
- Includes pension, mutual, bond funds, and insurance companies, equity hedgers
- High Frequency Trading
- Profit from small movements and variations in FX
- Arbitrage, market-making, economic data trading, short-term correlation
- Contributes to noise
- Central Banks
- Monetary policy
- Moral suasion
- FX intervention
- Diversification
- Intervention recycling (discussed in ch. 5 but I still don’t really understand what it is)
- Sovereign wealth funds
- Trade actively in large amounts like central banks
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