Exploring the Forex Market: A Deep Dive into Interbank and Over-the-Counter Trading

Forex, the currency trading market, sees over $6 trillion daily turnover.

Currencies are bought and sold based on exchange rates influenced by economic and political events.

Major players, including banks, engage in forex for various purposes through the interbank and OTC markets.

Traders working at computers on a Forex trading floor.
Traders on the floor of a Forex exchange.

The Interbank Market

The interbank market is the central hub for currency trading among banks, operating 24/5 through electronic networks.

It’s competitive and transparent.

Banks trade forex in the interbank market for three main reasons:

Banks engage in forex trading for various reasons:
  1. To provide liquidity to the market and clients by acting as market makers.
  2. To execute currency exchange orders for clients involved in international trade, tourism, or investment.
  3. To hedge currency risk and adjust balance sheets, mitigating the impact of exchange rate fluctuations.
  4. To meet reserve requirements, comply with regulations, and optimize capital structure.
  5. To speculate on market movements using expertise, strategies, and tools for profit-making.
  6. To utilize leverage for increased trading power, though it amplifies potential returns and losses.

The Over-the-Counter Market

The over-the-counter market is the secondary channel of the forex market, involving currency trades among banks, brokers, hedge funds, and retail traders.

Unlike the interbank market, it is decentralized, and unregulated, but less transparent and competitive with private price and volume information.

Banks trade forex in the over-the-counter market for two main reasons: Banks engage in over-the-counter forex trading to diversify portfolios, increase returns, and access a wider range of currency pairs.

They also serve clients, earning commissions for facilitating transactions and providing services.

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Banks utilize two primary channels for forex trading: the interbank market and over-the-counter transactions.

They trade for multiple purposes. Banks employ various techniques and tools for efficient forex trading.

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