Where banks trade money, bank to bank:the deepest pool, the widest tank.
The network of banks that trade currencies directly with each other, forming the backbone of the forex market.
The interbank market sets the exchange rates that retail traders see.
In plain words
The interbank market is the network in which large banks trade currencies with one another, directly or through electronic dealing systems. It has no single exchange or building: it is many banks quoting prices to each other around the clock on working days.
See it move
Interbank market and Bank A
Why it matters
Prices on a retail platform are derived from prices in this wholesale market, passed on through liquidity providers and brokers with a spread or commission added along the way. This is why there is no single official price for a currency pair at a given moment, and why quotes can differ slightly between providers.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
Two banks quote the same pair at the same moment.
- 1Bank Abid 1.10000, ask 1.10010
- 2Bank Bbid 1.10005, ask 1.10015
- 3Best bid is the higher one, B’s 1.10005; best ask is the lower one, A’s 1.10010
A participant seeing both quotes can deal at the best of each, which is how competing quotes narrow the spread.
A common mistake
It is tempting to picture one central price that everyone sees. Foreign exchange is traded over the counter, meaning directly between parties, so each participant sees the quotes of the counterparties it deals with.
Check yourself
Educational information, not investment advice or a recommendation to trade.