I received the following question from one of my list members today:
“… you referred to the currency exchange cash market and the fact that this is basically a market between banks across countries. Does this mean that, for example, the EURO/USD exchange rate is set between the Federal Reserve and the ECB? Is that how a price is established without the benefit of any trading on any listed exchange anywhere else? Thanks for the brief education on this particular point.” – Stan Z.
The forex spot market is primarily an “interbank” market. That means the majority of the trading volume is done bank-to-bank such as between Citibank and Goldman Sachs, for example. This trading is generally done on behalf of banking customers such as multinational corporations, though the banks also trade with each other both to hedge their currency exposure and to take on trading positions.
This sort of market structure is the same as the one for most cash market government debt trading, such as that for US Treasury Bonds and the like. You can think of it like the over-the-counter market for stocks. Those trades don’t go through an...
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