Interbank market

The wholesale layer of the currency market, and the reason foreign exchange is described as an over the counter market. Participants are banks, together with a smaller number of non-bank firms that make prices professionally, and each deal is a bilateral agreement between two named institutions. Access is governed by credit: an institution can deal only with counterparties that have extended it a line, so who can trade with whom is part of the structure rather than an administrative detail.

Prices are formed by each institution streaming its own two way quote, on electronic matching venues and directly to its clients. Several different prices for the same currency pair therefore exist at the same instant at different institutions, none of them incorrect, and no venue is authoritative. A retail quotation is assembled downstream from a set of those streams, which is why the price on a platform reflects the particular liquidity providers a broker has aggregated as well as the market itself.

The interbank rate quoted on comparison sites is the detail that misleads. It is usually a mid rate, the midpoint between a bid and an offer, and no transaction happens at a mid rate in either direction. The quotes that make up that midpoint are also available only in institutional size and only to firms with the credit standing to deal in it, so it is a reference point rather than a price anybody outside that market could obtain.