The Interbank Market is a market where different types of currency are traded between large privately held banks 24 hours per day and 5 days per week. The interbank market is what people are referring to when they are talking about the currency market. It is what institutional traders such as banks, sovereign nations, some large hedge funds, and generally large very well-capitalized institutions trade on.
To the retail trader the forex market, FX market, or foreign exchange market is what they will be trading on which has a slight distinction from the interbank market. Generally, a retail trader will be trading on a retail FX broker platform that has access to trade clearing with an interbank trading partner. The FX broker acts as a middleman for the retail trader to the interbank market in this sense.
Trading in the Interbank Market
When trading the FX market it’s essential to understand that the market is not in any specific physical location. This is different from an exchange like the London Stock Exchange or the New York Stock Exchange for example. The foreign exchange market is known as an Over the Counter market which is commonly referred to as an OTC market.
The rooting of the FX market is also referred to as the Interbank Market. The entire FX market is run electronically within a network of banks and financial institutions continuously over a 24-hour period. What this means is that large institutional traders don’t have to be at any central location to place a trade. They can trade at virtually any time of the day or night and from any location in the world. This freedom of access to the FX market allows traders to trade from anywhere in the world at any time with a laptop computer and a stable internet connection. Of course, large institutional traders would likely be at an office desk in a city skyscraper somewhere rather than on a beach with a laptop.
In this interbank market, the most actively traded currency is the US dollar, the Euro comes in second, and the Japanese Yen comes in third. These are typically the largest volume currencies because of the many cross-border transactions between multi-country trading partners.
Participants in the Interbank Market
The largest bank traders in the interbank market are Citicorp, JP Morgan, Deutsche Bank, and HSBC. Other participants include trading firms, sovereign nations and hedge funds.
In order to be considered an interbank market maker, a bank must be able and willing to market make and take prices to and from other participants. Interbank deals typically range from $1 million to $100 million but can also exceed $1 billion in a single deal.