In relation to forex trading, the interbank market is the global system or network where banks and financial institutions trade currencies between themselves (with “inter” meaning “between”).

    The wholesale nature of this market enables the banks to maintain liquidity and to meet the demands of their retail customers.

    A significant proportion of forex transactions take place in the interbank market.

    How does the interbank market work?

    It is primarily major international banks that participate in the interbank market, but smaller banks and large global corporations can also get involved. Banks will either trade directly with each other or organise transactions via online brokering platforms.

    Thomson Reuters and Electronic Broking Services (EBS) are two of the major players in the online brokering platform industry for interbank transactions, connecting over 1000 banks between them. Before the launch of EBS (which was created through collaboration between several large banks, Thomson Reuters had close to a monopoly on the market.

    Each interbank transaction involves an agreement between two or more banks to exchange certain amounts of currency at a fixed time and rate. The amounts of money involved are usually extremely large and anything up to $100 million may be considered unremarkable.

    This activity means that banks can profit from providing financial services to retail customers i.e. they are able to charge higher interest rates than those involved when they originally acquired the funds through the interbank market.

    The interbank market is decentralised which means that it is not regulated by any central institution or authority. Most central banks, however, will collect data from market participants to evaluate any economic implications. Problems in the interbank market can very quickly impact on overall economic stability.