Until the late 1990s, the forex market was the least known or utilized by individual traders and investors. When speaking of the forex market, most investors are referring to the interbank market. The interbank market is the home of currency trades in unfathomable amounts. An estimated four trillion in FX trading volumes changes hands daily in the interbank market.
Minimum trade sizes are one million of the base currency. Trading values of a hundred million are common and go through the market in a matter of seconds. When tracking trading prices online, the individual trading FX featured are based on the prices in the interbank market. Although this is clearly a market for the big time investors, traders of every size are welcome.
The Beginnings of the Interbank Market
The main purpose of the interbank market was to facilitate trade and commerce between nations. The leading international commercial banks being the main players. These institutions were well-established enough to expedite the currency transfers required to settle FX transactions.
Over time, this has evolved into an informal interbank market for currency trading. Each trade is an agreement between the banks of different nations to exchange the agreed amounts of currency at the specified rate on a fixed date. The interbank market is also referred to as the cash market or the spot market.
Interestingly, the interbank market is mainly unregulated by any governmental management. It operates based on credit lines between international banks and trading conventions without any overarching authority to govern it. The only other organized market for currency trading is the currency futures market.