Interbank Market

The interbank market is a global network of banks that trade currencies with each other, facilitating the exchange of one currency for another. It is the largest and most liquid market in the world, with an average daily turnover of over $6.6 trillion, according to the Bank for International Settlements.

How It Works

The interbank market operates on a 24-hour basis, with trading starting in Sydney and moving westwards through Tokyo, Singapore, London, and New York. Banks quote prices to each other based on supply and demand, and trades are typically executed over the counter (OTC) rather than on an exchange. The market is decentralized, with no single entity controlling it.

Banks in the interbank market trade currencies for a variety of reasons, including hedging against currency risk, facilitating international trade, and speculating on currency movements. They use a range of instruments, including spot transactions, forwards, swaps, and options.

Why It Matters

The interbank market plays a crucial role in the global financial system. It provides liquidity to other markets, such as the foreign exchange (forex) market, and helps to set global currency exchange rates. It also enables banks to manage their currency risk and facilitate international trade.

For retail forex traders, the interbank market serves as the primary source of liquidity. The prices quoted in the interbank market are used as the basis for the prices offered to retail clients by forex brokers. Therefore, understanding the interbank market is essential for retail forex traders to make informed trading decisions.