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.".. you known the currency exchange cash market and the fact that this really is basically a between banks across countries. Does this mean that, like, the EURO/USD exchange rate is placed between the Federal Reserve and the ECB? Is that how a price is set up minus the benefit of any trading on any listed trade elsewhere? Thanks for the education with this particular point." -... 

I received these problem in one of my record people today: 

.".. you referred to the currency exchange cash market and the fact this is basically a between banks across countries. Does this mean that, for example, the EURO/USD exchange rate is defined between your Federal Reserve and the ECB? Is that how a value is made with no benefit of any trading on any listed exchange anywhere else? Thanks for the quick education on this particular point." - Stan Z. 

The forex spot market is largely an "interbank" market. Which means nearly all the trading volume is completed bank-to-bank such as between Citibank and Goldman Sachs, for example. Although banks also trade with one another both to hedge their currency exposure and to take on trading opportunities, this trading is usually done on behalf of bank clients such as for instance multinational corporations. 

This kind of market structure is the identical to the one for most cash market government debt trading, such as that for US Treasury Bonds and so on. You are able to think about it like the over-the-counter market for shares. Those trades do not proceed through a change, but are done right broker-to-broker. 

In both forex and fixed income there are major people like hedge funds that get involved combined with investment and commercial banks. The world's central banks are also key participants only at that level within their efforts to influence exchange rates (forex) and/or interest rates (fixed income). 

The purchase sizes in the interbank market are large - broadly speaking $5 million and up. Certainly, the typical individual trader is not likely to be trading anywhere near that big. Where the online brokers and forex dealers can be found in to play that's. They allow small traders to accomplish transactions in somewhat lower amounts. In reality, there's at least one that'll do deals as small as $1. 

Here's where some folks obtain a bit worried. Several forex sellers really act as market makers making use of their clientele. By that after all they get one other side of the positions that are done by their customers. This is something which will often happen in the currency markets as well, particularly with OTC stocks. The concern that humans have with this particular may be the conflict of interest in terms of price delivery that makes. Is a dealer who will be taking the other side of one's trade planning to be working in your best interest once you placed on a trade? 

I'm quite confident that most of them are not working against their customers, while it may be true that some unscrupulous dealers may take advantage of their customers in that way. They simply provide liquidity to industry and make the spread to do so. When they've an excessive experience of any specific currency, they offset it by hedging in the interbank market or with still another seller. That's simply the same as a floor broker on any trade. 

Getting to the problem of how prices get set, the industry does that, not the central banks. Each dealer and individual bank is obviously placing its cost. That may appear a bit unusual in that different rates would be created by it throughout the place. The actual fact of the situation is, however, that costs between banks and dealers are almost always planning to be very, very close. There are services such as for example Reuters where dealer costs are aggregated and presented in knowledge feeds, allowing everyone to learn the existing (and historical) market rates. Arbitrage trading keeps retailers from quoting prices too far away from each other. 

There's also dealing in the futures market, and the relatively new currency exchange traded funds (ETFs). The task there, while just a small fraction of the international market size, also contributes to maintaining prices in line across the board. [http://www.artezanalnet.com.br/produtos/Poltronas/Marquesa poltronas discussions]