foreign exchange cashbackforexexness cashback forex the purchase forex rebate club sale between currencies, due to the different properties of currency sovereignty, no country can implement complete management of this, can not establish a cashbackforexbroker similar to the exchange, and thus the foreign exchange market is dest forexrebateclubed to be a decentralized market or over-the-counter market (OTCMarket) due to the delivery of transactions and clearing procedures involving different countries or different time zones As the market evolves, the strength of large banks gradually become market makers (MarketMaker), and communicate cross-border market these large banks commonly known as foreign exchange dealers (ForexDealer), end customers can only buy and sell through the dealers, and some remote places or small end customers also need to use the next level of banks to handle Foreign exchange business, the latter is still inseparable from the dealer bank Therefore, the traditional foreign exchange market is to the interbank market (Interbank) as the core, the customer market for the periphery of the two-tier structure (Two-tier) a, the eighties voice trading method 1.Customer market the mid-1980s, the end customer to buy and sell foreign exchange need to telephone Contact the dealer bank, the bank gives the offer is accepted by the customer, the bank in the interbank market to ask for quotes from peers and execute hedging transactions bank to end customers and peers reported a two-way price (Bid-AskPrice), the bid-ask spread for the spread, is the bank to make up for the transaction costs and bear the risk of position (InventoryRisk) compensation as a market maker, although not to assume the formal The obligation to provide liquidity, but according to the practice of both customers and peers can still be trusted to assume such obligations otherwise, their market share will be lost 2. Interbank market seventies between banks can be traded directly by telephone or telex 1981 Reuters (ThomsonReuters) adopted a data service system ( ReutersMarketDataService, RMDS), the system is similar to the electronic bulletin board to provide relevant information, but the transaction is still carried out through the telephone 1987 Reuters and the introduction of bilateral trading system for dealers that ThomsonReutersDealing2000-1 the system will only telephone communication into a message by telegram, similar to instant chat ( InstantMessage), but high speed, transaction records and back-office processing has also been electronic, and can communicate with multiple parties at the same time, and thus soon became the main trading tool between dealers, market transparency has been improved, but the market structure has not had a fundamental impact since the late 1980s to the early 1990s, the interbank market direct transactions and indirect transactions each accounted for Half of the market dealers can also be traded between the telephone broker (VocieBroker) since the sixties, brokers open their own proprietary, direct connection to the customer desktop of a closed telephone network to communicate with customers, which is similar to the walkie-talkie brokers call out real-time prices, traders either accept or reject because brokers focus on the search for price information between banks. Traders can rely on brokers to reduce the cost of price search at the same time, through the telephone broker, the transaction is anonymous before the transaction is reached, and through the broker can be a large amount of transactions into zero, spread to multiple counterparties, to avoid large transactions caused by unfavorable price changes 3. Voice trading method of foreign exchange transactions and market characteristics (1) interbank market and customer market Clearly defined interbank market completely excluded small banks and end customers, because the single transaction in the interbank market are basically more than 1 ~ 5 million U.S. dollars, not only the end customer can not enter the interbank market, the end customer can not be directly traded between the foreign exchange market presented to the interbank market as the center, the customer market for the periphery of the two-layer structure, the interbank market share of up to 80% above nbsp; (2) low market transparency traders directly traded information only the two sides know, the only source of market information is the price continuously shouted out before trading by telephone brokers, or after the transaction is reached brokers to buyers and sellers to disclose information, it is difficult to avoid discriminatory trading (3) high transaction costs and operating costs, the spread is large for the collection of information Traders often ask each other for quotations, and even from time to time, dealers thus have to pass some unwanted positions between them until the position is taken up by an end customer, which is known as hot potato trading (HotPotatoTrading), which is one of the reasons why interbank transactions account for more than half of the market share and the execution of transactions and post-trade bookkeeping, etc. is Through manual execution, error-prone and lead to operational risk high transaction costs will inevitably lead to large spreads, and then the customer market spread is even greater, the customer market spread is even 20 times the interbank market (4) low degree of integration Because the market information is widely dispersed in the dealers counter, and dealers or brokers are more facing the country or region of the customer, the international foreign exchange market is nothing more than Traders bank transnational link the so-called global foreign exchange market is nothing more than a simple superposition of a regional or domestic market, and todays global integration of foreign exchange market is far from With the development of computer technology, the interbank market electronic trading has become a reality (Figure 1) in April 1992 Reuters launched the electronic brokerage system D2000-2 ( ThomsonReutersMatching/ReutersDealing2000-2), the system and D2000-1 bundled together, accepting limit orders, using the principle of price priority, time priority, automatic aggregation of transactions to meet the challenges posed by Reuters, in September 1993 12 banks jointly launched the electronic brokerage system EBS ( ElectronicBrokingService) since then, the interbank market has basically become a limit order (LimitOrder) electronic trading market, telephone brokers market space was greatly crowded, mainly in the poor liquidity of the market in 2010 accounted for only 10% of the share of spot trading, and EBS long dominated the euro, yen and Swiss franc currency trading, Reuters dominated the British pound, Australian dollar, New Zealand dollar, Canadian dollar and emerging market currencies 1. Trading through the electronic brokerage system has the characteristics of (1) the use of order-driven (Order-driven) trading mechanism, the banks do not have to bidirectional quotes, that is, the simultaneous reporting of the purchase and sale price, thereby accelerating the market effective price (2) the minimum trading unit is much smaller than the traditional interbank market trading unit, so that some smaller banks can enter the interbank market (3) electronic trading platform in real time to centralize all the buying and selling quotes, and the order book (OrderBook) form to show the number of each buy and sell quotes corresponding to enhance the transparency and enhance the price discovery function (4) the efficiency of the aggregated transaction is higher than that of the telephone broker (5) the later transaction report is more efficient, and the post-trade transparency is improved (6) traders are completely anonymous transactions, avoiding price discrimination (7) the electronic brokerage system connects traders in different countries and regions, thus aggregating the prices of different regions information, eliminating the spatial separation of foreign exchange transactions and increasing cross-border transactions between banks (8) compared to the commission charged by telephone brokers, the electronic brokerage system charges a fixed usage fee, thus helping to reduce the spread in the interbank market2. Reduce the price search cost, improve the efficiency of the transaction, reduce the spread of the interbank market in the face of the decline in spreads, dealers to increase profits turned to the strategy of large-scale transactions to deal with large-scale transactions need to improve the hardware and software facilities, the need for large-scale investment, resulting in the rise of the concentration of the interbank market electronic brokerage system also provides the convenience of the opening of the interbank market later EBS& Reuters opened its doors to financial institutions other than dealers in 2004 and 2005, respectively, by which some large banks acted as brokers through prime brokerage arrangements (PrimeBrokerage) allowing their clients, such as hedge funds (HedgeFund) and some high-frequency traders (HighFrequencyTrader), to Use their credit to trade directly or indirectly with other traders in the interbank market (see Figure 2 logo ①) As a result, their clients transactions with any third party are transferred to the broker, who becomes a counterparty to both sides of the transaction (similar to an exchange clearing house) The broker receives a fee based on the amount of the transaction, while clients such as hedge funds receive capital leverage, centralized clearing and reporting services Because of the limited credit history of many hedge funds, prime brokerage provides access to new counterparties, and the margin paid to the broker can be calculated based on the net amount of their positions rather than the total amount prime brokerage provides anonymity to clients, as some large hedge funds have been concerned about banks pre-empting (FrontRunning) or sharing their trading information with According to BIS (2013), trades effected through prime brokerage arrangements account for 23% of total trading volume in the UK and US, reaching 38% in spot trades, while on EBS/Reuters, trades between dealers and other financial institutions have exceeded 17% of inter-dealer trades This is the reason for the decline in traditional inter-bank market share One of the three, since 2000 based on the computer and the Internet trading method innovation the late nineties to the early twentieth century the rapid development of Internet technology on the foreign exchange market has had a revolutionary impact on the foreign exchange market for the decentralized market characterized by the foreign exchange market, the Internet for both sides of the transaction to provide more interactive interface, further breaking down the market barriers that already existed. The foreign exchange market structure has therefore undergone structural changes 1. Foreign exchange trading method innovation (1) the establishment of trading platforms for end customers First, the multi-dealer platform (Multi-dealerPlatform, MDP) the application of electronic brokerage system greatly reduced the spread in the interbank market, but the spread in the customer market was not affected, and high profitability stimulated competition in the client market The mid-1990s saw the emergence of electronic communication networks (ElectronicCommunicationNetworks, ECNs) in the U.S. stock market as an alternative trading system (AlternativetradingSystem, ATS) because, in the stock market Customers are concerned that when trading on the NYSE and NASDAQ brokers may give unfavorable quotes, and in ECNs on both sides of the transaction orders are always on an equal footing, using anonymous trading, in accordance with the principle of price first, time first by the system automatically aggregated transactions, avoiding the involvement of traditional brokers (ECN operators do not participate in the transaction) Based on the same considerations, foreign exchange quotation provider CMC ( CurrencyManagementCorporation) in May 1996 established the first Internet-based non-bank network platform Deal4free, the realization of direct transactions between customers customers around 2000 the development of network companies reached its peak, such client electronic trading platform will spring up due to the lack of liquidity Due to the limitations of illiquidity, these platforms are weak in price discovery and therefore invite liquidity from multiple banks, so these platforms have basically become multi-bank trading platforms, i.e. multi-dealer platforms, generally of the order-driven type, but also quote-driven (Quote-driven) The first multi-dealer trading platform was established by Currenex (founded in 1999), a high-tech company in Silicon Valley. In 2004 Currenex launched an ECN platform FXTrades and other platforms such as IFXMarkets (1999), MatchbookFX (1999), HOtSpotFx (2000), OANDA (2001), and OANDA (2001). OANDA (2001), Lava (2001) and ChoiceFX (2010) have been established Second, the single-dealerPlatform (SDP) the most important measure of the big banks is to develop their own customer platform to provide their own customers with trading facilities This type of platform provides its customers with Multiple standard terms on the tradable real price (FirmPrice), customers can choose both the standardized click to trade (ClicktoTrade), but also personalized way to request for quote (RequestforQuote, RFQ), belong to the offer-driven trading platform Third, the retail integration platform ( RetailAggregatorPlatform)limited by the size of the transaction, including individual investors, including small investors have long been blocked from the market about 2000, a number of non-bank companies and small banks launched a retail consolidation platform they serve small trading accounts (generally $ 250 or more), including households as well as small companies, asset managers, trading They generally offer their clients leverage of up to 200% of their capital, but require initial margin. They operate as foreign exchange brokers, automatically consolidating traders small trades into large orders for the interbank market and matching quotes from banks, while other retail consolidators combine the dual role of proprietary traders, consolidating some trades but at the same time strategy of becoming counterparties to some other traders retail trading in 2001 can still be small to negligible, by 2010 has reached $ 125 to 150 billion per day, 8% to 10% of spot trading and according to BIS (2013), the proportion of retail trading to spot trading and all transactions is 3.8% and 3.5%, the proportion of retail trading to spot trading in the United States and Japan, respectively is 19% and 10% of these electronic trading platforms do not operate in isolation, network technology to achieve the interconnection of platforms end customers can not only get real-time prices and real-time transactions, but also the interconnection of platforms allows liquidity to be transferred between different platforms, traders can the best price deal between traders, between traders and customers and between customers may become mutual trading counterparties, which not only extends the traditional B2B and B2C, but also enables customer-to-customer transactions (C2C) According to BIS2013, transactions executed through electronic trading methods have exceeded 50%, reaching 64% in spot transactions, and has spread to all types of foreign exchange trading products telephone trading methods are currently mainly in the less liquid some currencies, as well as some derivatives trading (such as (2) trading increasingly automated: programmed trading and high-frequency trading The application of computer technology has fundamentally changed peoples understanding of the concept of trading, not only the accounting books in the background of the transaction can be completed by straight-through processing procedures (Straight-ThroughProcessing, STP) to almost completely avoid human intervention, but also changed the trading itself, the computers automated functions have given rise to programmed trading (also known as algorithmic trading or intelligent trading) (AlgorithmicTrading) and high-frequency trading algorithmic traders, including proprietary traders and some financial institutions, through the ApplicationProgrammingInterface (ApplicationProgrammingInterface,) API), the ability to program computer-based trading models to accept market data and process information according to established trading rules, the computer can automatically initiate and execute transactions, while traders are primarily responsible for developing and modifying the parameters of the trading model It is estimated that algorithmic trading accounts for more than 50% of the interbank trading platform, growing from 28% to 68% in 2007-2013 high-frequency Trading was first used in the 1980s for large financial institutions in Europe and the United States, and popular securities markets after the 1990s with the emergence of electronic trading platforms / ECN and the opening of the interbank market, providing a huge living space for high-frequency trading high-frequency trading so far does not have a unified definition, it is generally seen as a new trading method incubated by algorithmic trading according to the U.S. Securities and Exchange Commission (SEC). According to the Securities and Exchange Commission (SEC), high-frequency trading has the following characteristics: the use of exchanges and other institutions to provide colocation (Co-location) and market data services to reduce latency; in the short-period time frame to establish and eliminate positions; a large number of orders submitted and quickly withdrawn; hold positions not overnight In short, high-frequency trading is the use of ultra-high-performance computers and sophisticated trading algorithms, through the high frequency of of, small transactions, quickly capturing short price differences to achieve profit trading methods currently active in multi-bank trading platforms as well as EBS due to the lack of strict definitions, and technically difficult to distinguish it from other algorithmic trading, high-frequency few sound statistics KingandRime (2010) estimate that high-frequency trading accounts for about a quarter of spot trading volume, while EBS estimates that 30% to 35% of transactions on its platform are driven by high-frequency trading, the expansion of high-frequency trading in recent years may be one of the reasons for the rise in global foreign exchange trading volume May 16, 2010 after the flash crash of the U.S. stock market (FlashCrash), for high-frequency trading may lead to systemic risk and market manipulation, Europe and the United States to strengthen the regulation of high-frequency trading but due to The special nature of the foreign exchange market, high-frequency trading in the foreign exchange market has few restrictions, non-compliant trading strategies in the general securities market can also make a big difference, almost all market participants, including traders, may become the object of high-frequency trading calculations and in order to make the trading system to improve a few subtle speed and design better trading algorithms, high-frequency traders as well as large banks have been engaged in The arms race of hardware and software facilities (3) multilateral, real-time, net foreign exchange transaction clearing clearing is an important aspect of foreign exchange transactions, the development of information technology has likewise revolutionized the clearing system of the global foreign exchange market Given the interconnectedness of the financial system, the failure of clearing a large transaction will trigger a series of defaults clearing risk arises because the funds are settled across borders only in the currency If one party to a foreign exchange transaction clears before the other party, the party waiting for the other party to settle will face the risk of counterparty default, which is known as Herstattrisk (Herstattrisk) in 2002 ContinuousLinkedSettlement (CLS) Bank began operation, it reduces risk by simultaneously settling the funds of both traders, and the use of multilateral netting between member banks, the result is that only 4% of the transaction amount of funds transfer can be completed to clear all transactions CLs Bank has become an important part of the foreign exchange market today In 2010, it cleared about 43% of spot transactions, and continue to increase the types of currencies cleared and clearing members of foreign exchange transactions clearing risk reduction and clearing efficiency of the increase in foreign exchange transactions undoubtedly have a favorable impact 2. Since 2000, the impact of innovation in trading methods on the foreign exchange market (1) greatly improved the quality of operation of the foreign exchange market it greatly improved the openness of the market, for a wider range of participants to open the door to the market, so that a large number The institutional investors, proprietary trading companies, as well as individuals and families to become market players (2) profoundly changed the market structure If the foreign exchange market structure before the 1990s was a linear structure with the interbank market as the center, the customer market as the periphery and obvious separation between the two, with large dealers as the medium to connect the countries (regional) market, todays foreign exchange market is evolving into a networked structure connected by electronic means of trading, dominated by global banks and non-bank institutions, with various players competing on the same stage, the boundaries between the interbank market and the client market becoming increasingly blurred, and the spatial segmentation of the market disappearing In this structure, on the one hand, the traditional interbank market is declining in status, and foreign exchange transactions are showing a trend of disintermediation According to BIS (2013), the interbank market share fell from 63% in the nineties to 39%, replaced by non-dealer financial institutions, including non-dealer banks (smaller banks), institutional investors (pension funds, mutual funds and insurance companies, etc.), as well as high-frequency trading firms and official financial institutions (such as sovereign wealth funds, central banks, etc.), whose market share has reached 53%, indicating that small banks, institutional investors, and hedge funds On the other hand, banks with the advantage of scale and a global distribution network sufficient to support continuous technological innovation and offer competitive prices have the advantage that an increasing proportion of liquidity is provided by a small number of large global dealers as principals who accept and manage market risk and earn profits according to the 2010 Euromoney magazine ( According to a 2010 Euromoney survey, the top five banks account for more than 50% of the foreign exchange market, compared to less than a third in the 1990s. In their own order books to hedge customer orders against each other, only the internal can not be hedged to get the interbank market currently large traders can be 80% of customer orders in their own order books against each other, which undoubtedly increased the profitability of large traders (3) stimulate the transformation of the banks business strategy traditional foreign exchange market in the liquidity provider in the center of the market Status, electronic trading method to break the original market pattern on the one hand, liquidity scattered in various trading platforms, but the interconnection of the platform but further liquidity gathered together; on the other hand, the provider of liquidity and the role of the demand for dynamic transformation of the traditional dealer as a liquidity provider status in decline, customers and customers between bilateral transactions (C2C) has become a reality, more and more electronic In this new trading environment, banks are increasingly trading with an agency element. On the one hand, large dealers are increasingly becoming liquidity aggregators (LiquidityAggregator) through the construction of trading platforms, which, in addition to their own business and providing liquidity, also provide ancillary services to generate revenue. On the other hand, for smaller banks, it is unrealistic to undertake high technology investments or operate full time zone for all currencies in an environment of low spreads These small banks seek market gaps (Niche) By white-labeling, these smaller banks outsource their liquidity functions to larger banks for end-customers, while acting as retail consolidators to broker transactions between clients and dealers, but not accepting and holding price risk as a trading entity, providing only market interface, credit risk management and other commission-based services. credit risk management and other commission-based ancillary services (4) the impact on ordinary foreign exchange investors in general, foreign exchange trading methods are divided into fundamental trading and technical trading method, the new market environment makes the traditional technical trading methods effectiveness greatly reduced, especially for short term traders nineties, if investors master certain trading techniques, perhaps also be able to comfortable to grasp the market trend, but today the prevalence of algorithmic trading, especially high-frequency trading, in the small time period of the trading framework, the direction of market volatility is elusive institutional investors use algorithmic trading and high-frequency trading, making full use of its speed advantage, with the manipulation of the market trading strategy to create the perfect technical graph on the short-period chart to lure traders, so as to implement a large-scale sweep stop loss, trigger pending orders Operating practices, including ordinary institutional investors, including short-term investors often become the prey of these well-equipped financial killers, foreign exchange trading is evolving to capital technology-intensive
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