I have been looking at the way "cross currencies" are traded in the retail fx market. It is widely assumed that any cross pair, that is, any pair where neither the quote currency nor the base currency are USD, is always traded with USD as the "vehicle currency". That is, if you are long GBP/JPY, the transaction is USD neutral, BUT the transaction is actually made up of a GBP/USD long and a USD/JPY long when your order hits the market.
Therefore, the GBP/JPY price is actually calculated using the two USD pairs, and there is no market where banks actually trade GBP/JPY directly. The banks have their reasons for doing this, which I won't get into, suffice it to say that doing so simplifies their lives a great deal to not need to worry about too many pairs.
There are a few questions I would like to put out there for those of you who are familiar with the inner workings of the interbank market.
1. Is it true that there really is NO OTC interbank dealer that deals in cross currencies directly?
2. If there isn't, shouldn't there be? Particularly for pairs like EUR/CHF and EUR/GBP that are widely traded?
3. If there is, there should also be some room for arbitrage, as "calculated" cross prices would often differ somewhat from their directly traded counterparts. How could a trader take advantage of said arbitrage?
Therefore, the GBP/JPY price is actually calculated using the two USD pairs, and there is no market where banks actually trade GBP/JPY directly. The banks have their reasons for doing this, which I won't get into, suffice it to say that doing so simplifies their lives a great deal to not need to worry about too many pairs.
There are a few questions I would like to put out there for those of you who are familiar with the inner workings of the interbank market.
1. Is it true that there really is NO OTC interbank dealer that deals in cross currencies directly?
2. If there isn't, shouldn't there be? Particularly for pairs like EUR/CHF and EUR/GBP that are widely traded?
3. If there is, there should also be some room for arbitrage, as "calculated" cross prices would often differ somewhat from their directly traded counterparts. How could a trader take advantage of said arbitrage?