The interbank market is a global network used by financial institutions to directly trade currencies and other currency derivatives between them. Although some interbank transactions are conducted by banks on behalf of big customers, most interbank transactions are self-operated, which means that they are conducted on behalf of banks' own accounts. Banks use the interbank market to manage their own exchange rate and interest rate risks, and take a speculative stance according to research. The inter-bank market is a subset of the inter-dealer market, which is an over-the-counter trading place where financial institutions can trade various asset classes on behalf of customers, usually facilitated by the inter-dealer broker (IDB).
Point: The interbank market is a global network used by financial institutions to directly trade currencies and other currency derivatives between them. Banks use the interbank market to manage their own exchange rate and interest rate risks, and take a speculative stance according to research. Most transactions in the inter-bank network last for a short time, ranging from overnight to six months.
Foreign exchange serves the commercial turnover of monetary investment and a large number of speculative and short-term currency transactions. The typical term of interbank market transactions is overnight or six months. The inter-dealer market of foreign exchange is characterized by large transaction scale and small bid-ask spread. Currency transactions in the interbank market can be speculative (the only purpose of launching is to profit from currency changes) or to hedge currency risks. It may also be proprietary, but to a lesser extent driven by customers? For example, corporate customers such as exporters and importers through institutions.
The inter-bank foreign exchange market developed after the collapse of the Bretton Woods Agreement and the decision of former US President Richard Nixon to cancel the country's gold standard on 197 1.2. At that time, the exchange rates of most large industrialized countries were allowed to float freely, with only occasional government intervention. There is no centralized place in the market, because transactions are carried out all over the world at the same time and only stop on weekends and holidays. The emergence of floating exchange rate system coincides with the emergence of low-cost computer system, which makes the global transaction speed faster and faster. In the early days of inter-bank foreign exchange transactions, voice brokers in the telephone system matched buyers and sellers, but it was gradually replaced by computer systems that could scan a large number of traders to get the best price. The trading systems of Reuters and Bloomberg allow banks to trade billions of dollars at a time, and in the busiest days of the market, the daily trading volume exceeds 6 trillion dollars.
In order to be regarded as an interbank market maker, banks must be willing to set prices for other participants and make inquiries from them. A single inter-bank transaction can reach up to $654.38 billion. The biggest participants include Citibank and JPMorgan Chase in the United States, Deutsche Bank in Germany and HSBC in Asia. There are several other participants in the interbank market, including trading companies and hedge funds. Although they contribute to the exchange rate setting through transactions, other participants have less influence on the currency exchange rate than big banks.