Many individual forex traders who trade online and have never worked for major banks wonder what goes on inside those huge forex market-making financial institutions. This article is written to assist individual traders in understanding the process that a professional market-maker goes through when quoting a typical forex counterparty.
While Electronic Broking Services or EBS, Reuters Dealing 3000 Spot Matching and traditional interbank brokers facilitate transactions in a considerable amount of the interbank forex deal flow, a huge amount of forex dealing still takes place over the telephone, just as it has for many years.
Often, such deals are consummated between a customer speaking over the phone to an advisor at a bank who then verbally requests a price from the bank’s professional market-maker that specializes in quoting prices in the currency pair requested by the customer.
Making a Price
For example, when contacted to make a price in EUR/USD, the EUR/USD market-maker at the bank will usually be asked by the advisor what their market or price in EUR/USD is in the amount of the transaction. This could sound like “Euro Dollar in 10 (million) Euros.”
The market-maker will then respond with a two-way quote that contains the price they are willing to purchase that amount at and the price that they are willing to sell that amount for.
To save valuable time, professional currency market-makers will often only quote the last two decimal places of the exchange rate, provided that the others are obvious to the individual requesting the price.
If not, the market-maker might state the bigger figures first, and then focus on quoting just the last two decimals. In EUR/USD, this might come across as “1.30” (first quoting the initial part of the rate as “one thirty” and then pausing to get the last two decimals right) “50 55” (usually said “fifty fifty-five”).
This quote means the market-maker is willing to buy the amount in which the price was requested at a rate of 1.3050 and sell that amount at 1.3055.
If the market changes during the quoting process, the market-maker will usually say “off” or “change” to indicate that they are off their price since the market has changed since they last quoted. They then go through the process of providing a two-way price again as long as the counterparty’s dealing interest still exists, which the counterparty can prompt with the word “again”.
Generally, a market-maker’s price is only good “as long as the breath is warm” when dealing over the telephone, although electronic dealing systems usually require a price to be pulled manually.
As a result, if a significant pause has taken place between the time of the quote and the time of dealing, it is customary for a counterparty dealing over the phone or in person to ask if the market-maker is “still there?” even if they have not yet said “off”.
Consummating and Confirming the Deal
If the price quoted by the market-maker is acceptable to the counterparty, they will then say either “yours”, “I sell” or “at 50, 10 Euros” to sell 10 millions Euros against the U.S. Dollar at 1.3050 to the market-maker. The market-maker will then usually reply by saying “at 1.3050 I buy 10 Euros” to confirm the trade.
On the other hand, if the counterparty wanted to buy, then they would say “mine”, “I buy” or “at 55, 10 Euros” meaning they want to buy 10 millions Euros against the U.S. Dollar at 1.3055, with a subsequent confirmation from the market maker being “at 1.3055 I sell 10 Euros”.
At this point the deal is done, and the bank’s back office will confirm the trade to the counterparty soon thereafter. However, if the price is not acceptable, or the counterparty has lost their dealing interest, they will usually say something like “pass,” “nothing” or “nothing done”.
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