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Reader Questions Answered The Basics

Is the Forex Market Too Big to Manipulate?

One of the readers at Forex Live asked the question:

“What would you say about the FX market being too big for manipulation? I’ve heard this so many times, but the recent price action of EURUSD just screams the opposite. The big banks RULE the markets and they do whatever they want. How can we small players survive in this market?”

Jamie, the head man over there with whom I’ve worked in the past (I’ve also worked with Gerry, one of the other primary posters), had this to say in response:

I’ll put it this way. The forex market can be influenced by a big player or two in the near-term but not manipulated for very long.

I totally agree with what Jamie says in terms of any one single player being able to control the forex market (except possibly in the case of the less liquid more regional currencies). If some big player comes in with a large order it’s going to have an impact on prices, just as it would in any other market, but that impact will only last so long as the supply/demand dynamic in the market supports it. Say a big hedge fund comes through with a $50bln buy order for USD/JPY. There’s no doubt that prices will be influenced by that order. If, however, there isn’t any additional buy interest in USD/JPY once that $50bln goes through, prices will invariably adjust back down.

Keep in mind the size of the forex market – about $4trl in daily volume according to the estimates. That’s makes it hard for any one player, or even a set of players, to move for a sustained period. Compare that to something like gold. On a good day about 250,000 futures contracts trade there. At a prices of $1300/oz and a contract size of 100 oz, that’s a notional value of about $32.5bln. That’s less than 1% the volume of forex market trading (and about 1/5th the notional volume of the 10yr Note futures), which is why I’ve been saying for a while now that if money really started moving into gold it would go parabolic.

I’ll also agree, however, with the questioner’s point about the big banks ruling the market. They do. The big banks are the primary price makers in forex. That doesn’t mean, however, that they can move the bid/ask strictly of their own accord. They have to react to the demands of the market. The big banks are in direct competition with each other for transactional flow business, and there’s so much pricing information available to customers these days, that banks cannot get far out of line with each other or risk losing business.