Investment Bank

An investment bank is a financial institution that provides a range of financial services to clients, including corporations, governments, and high-net-worth individuals. One of the key services offered by investment banks is foreign exchange (FX) trading.

In the FX market, investment banks act as intermediaries between clients who wish to buy or sell currencies. Investment banks typically have access to the interbank market, where the largest FX transactions take place. They can offer their clients competitive prices and execute trades on their behalf.

Investment banks also provide FX research and analysis, which helps clients make informed trading decisions. FX research may include macroeconomic analysis, technical analysis, and fundamental analysis, as well as insights into specific currencies and markets.

In addition to FX trading and research, investment banks may provide other FX-related services, including hedging, risk management, and financing. Hedging involves using financial instruments such as options and forwards to reduce currency risk, while risk management involves monitoring and managing currency exposure. Financing involves providing clients with the capital needed to execute FX transactions.

Overall, investment banks play a critical role in the FX market, providing clients with access to the interbank market, research and analysis, hedging and risk management services, and financing. Investment banks help to facilitate the smooth functioning of the FX market, which is essential for global trade and investment.

Size of industry

Global investment banking revenue increased for the fifth year running in 2007, to a record US$84.3 billion, which was up 22% on the previous year and more than double the level in 2003. Subsequent to their exposure to United States sub-prime securities investments, many investment banks have experienced losses since this time.

The USA was the primary source of investment banking income in 2007, with 53% of the total, a proportion which has fallen somewhat during the past decade. Europe (with Middle East and Africa) generated 32% of the total, slightly up on its 30% share a decade ago. Asian countries generated the remaining 15%. Over the past decade, fee income from the US increased by 80%. This compares with a 217% increase in Europe and 250% increase in Asia during this period The industry is heavily concentrated in a small number of major financial centers, including London, New York, Hong Kong and Tokyo.

Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. New products with higher margins are constantly invented and manufactured by bankers in the hope of winning over clients and developing trading know-how in new markets. However, since these can usually not be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins.

For example, trading bonds and equities for customers is now a commodity business, but structuring and trading derivatives retains higher margins in good times—and the risk of large losses in difficult market conditions, such as the credit crunch that began in 2007. Each over the counter contract has to be uniquely structured and could involve complex pay-off and risk profiles. Listed option contracts are traded through major exchanges, such as the CBOE, and are almost as commoditized as general equity securities.

In addition, while many products have been commoditized, an increasing amount of profit within investment banks has come from proprietary trading, where size creates a positive network benefit (since the more trades an investment bank does, the more it knows about the market flow, allowing it to theoretically make better trades and pass on better guidance to clients).