Interbank market — the top tier of the forex market

When the EUR/USD quote in your app twitches every few seconds, you are looking at a shadow. The original is made one floor up, among a small group of the world's largest banks that quote each other prices around the clock and trade currencies in amounts measured in billions. That layer is called the interbank market. This is where the price is born — the same price your platform shows you a fraction of a second later. Below I explain what this market actually is, who really plays on it, and how its quote flows down to a retail account.

What the interbank market really is

The interbank market is the wholesale, top tier of foreign exchange. There is no central exchange and no single building where everything happens — it is a network of trading relationships between dealers, meaning the banks that make a market for their clients every day. These banks buy and sell currencies directly among themselves, and by doing so continuously, they set the price the rest of the world treats as the reference.

The scale is hard to overstate. According to the Bank for International Settlements Triennial Survey from 2022, global daily turnover on the foreign exchange market is about 7.5 trillion dollars. No other financial market is this liquid. Crucially, the bulk of that turnover does not come from individual investors or even from funds — it is banks trading with one another and handling the orders of their largest clients. The retail market is only the thin top layer of the whole thing.

The word "dealer" matters here. A dealer is not a middleman who matches two parties and takes a fee — it is a firm that stands on the other side of the trade itself. When a large client wants to buy euros, the dealer bank sells them from its own book and then manages the resulting risk by offsetting the position in the interbank market. This is how a tier-one market maker works, and it is how continuous two-way pricing comes into being.

Who actually makes this market

Despite the name "interbank market", this is not thousands of banks on equal footing. In practice a handful of global dealers dominate. According to the Euromoney FX Survey from 2024, the five largest banks handle more than forty percent of global currency turnover. JPMorgan leads with a share of about 11.6 percent, followed by UBS at about 9.5 percent (after absorbing Credit Suisse), Citi at about 8.8 percent, Deutsche Bank at about 7.1 percent and Goldman Sachs at about 5.4 percent.

Add HSBC, Bank of America, Barclays, BNP Paribas and Morgan Stanley to that group, and the top ten accounts for roughly two-thirds of inter-dealer turnover. That is why we speak of a "top tier" — a few institutions see such a stream of orders from corporates, funds and other banks that their quotes effectively set the market price.

"In foreign exchange, liquidity is concentrated in the hands of a small number of large dealers, and market structure shifts with the way those dealers manage their own risk." — Hyun Song Shin, Chief Economist of the Bank for International Settlements, 2022

Where does a domestic bank fit in all this? A mid-sized national bank does not belong to that top ten and does not create the global EUR/USD price. It operates one level down: it buys liquidity from one or two top-tier dealers and serves its own corporate clients on that basis. Its turnover still ends up inside the aggregate the BIS reports — it simply reaches that figure through a larger player.

How banks trade with each other

Inter-dealer trading runs along two routes. The first is electronic venues, where banks match orders anonymously — historically the most important have been EBS (now part of the CME group) and the order-matching system owned by LSEG, formerly known as Reuters. These produce the reference quotes for the most liquid pairs such as EUR/USD and USD/JPY. The second route is direct relationships — a bank connects, electronically or by voice, with a specific counterparty it has agreements with, and deals bilaterally.

And here we reach a barrier to entry that a retail trader rarely thinks about: credit. To trade with another bank, the two sides must have mutually granted credit lines — because a currency trade settles with a delay, and each side must trust that the other will honour its obligation. Without a credit relationship there is no trade, even if you can see the best price on the screen. It is credit, not technology, that is the real gatekeeper of this market.

The bridge for firms outside the top tier is prime brokerage. A large bank lends its creditworthiness to a client — a fund, for example — letting it trade with many dealers under the umbrella of a single relationship. I cover this mechanism separately in the piece on the prime brokerage concept; here it is enough to remember that without it a smaller player would never reach the interbank floor.

How the price flows down to your platform

It helps to picture it as layers. At the very top, top-tier dealers quote each other the tightest prices, because they trade in the largest volumes and carry the smallest unit risk. Below them sit regional banks and liquidity providers, who buy from the dealers and resell with a slightly wider spread. Lower still is your retail broker, who aggregates quotes from several such providers and shows you a single price on the platform.

Every layer adds its own margin — which is why the spread you see on a retail account is wider than the one the banks trade at right at the top. The same applies to swap rates: your CFD broker charges you a rollover calculated from wholesale swap points plus its own markup — this mechanism is explained in detail in the piece on who sets swap rates and why they differ between brokers. It is not a conspiracy but the cost of someone lending you access to liquidity you could not reach on your own. For more on how the world of big money differs from retail, see the comparison of retail and institutional trading, and I expand the idea of market depth itself in the piece on liquidity in forex. Because a portion of transactions at the top of the market takes place away from public platforms, it is worth understanding whether dark pools exist in forex and how hidden liquidity works. Institutions at the top of the pyramid also rely on last look, covered in the article on why a liquidity provider can reject your order.

The whole journey takes milliseconds. When you click "buy", your order does not physically travel to a JPMorgan trading floor — it goes to an aggregator that already holds the freshest quotes flowing down from the top. That is why the price on your screen looks "real and instant". It is real, but it is an echo of decisions made one floor up.

What to do tomorrow

1. Check which pair you actually trade. Open your broker's instrument list and compare the typical spread on EUR/USD with the spread on an exotic. The difference comes straight from how deeply each pair is quoted in the interbank market — the most liquid pairs have the tightest spreads because they are the ones priced daily by the largest dealers.
2. Work out your real entry cost. Take the spread in pips and multiply it by the pip value for your standard position size. That number is the combined margin of every layer between you and the top of the market — you will then see exactly how much you pay for access to liquidity before the price even moves in your favour.
3. Watch the spread during low-liquidity hours. Open your platform late in the evening, when the major dealers are less active, and note how the spread widens. It is the simplest proof that your price depends on what happens in the interbank market, not on your broker alone.
4. Put the market structure in order. If you want to understand the full hierarchy of participants, from the central bank down to retail, read the wider walkthrough of the market participants on ForexMechanics — it complements what I describe here with the broader context of the whole ecosystem.