It is generally not possible to get into a specific building and "see" the market where prices of foreign exchange are determined. With few exceptions, the vast bulk of foreign exchange business is done over the telephone between specialist divisions of major banks. Foreign exchange dealers in each bank usually operate from one room; each dealer has several telephone and is surrounded by video screen and video tapes. Typically, each dealer specializes in one or a small number of markets (such as sterling/dollar or deutsche mark/dollar). Trades are conducted with other dealers who represent banks around the world. These dealers typically deal regularity with one another and are thus able to make firm commitments by word of mouth.
Only the head or regional officers of the larger banks actively deal in foreign exchange. The largest of these banks are known as "market makers," since they stand ready to buy or sell any of the major currencies on a more or less continuous basis. Usually large transactions, however, will only be accommodated by market makers on more favorable terms. In such cases, foreign exchange brokers may be used as middlemen to find a taker or takers for the deal. Brokers do not trade on their own account, but specialized in setting up large foreign exchange transactions in return for a commission(typically 0.03 cents or less on the sterling spread). In April 1983, 56 percent of spot transactions by value involving banks in the United States were channeled through brokers. If all interbank transactions included, the figure rises to 59 percent. Most small banks and local offices of major banks do not deal directly in the interbank foreign exchange market. Rather, they typically will have a credit line with a large bank or their head office. Transact;ons will thus involve an extra step. The customer deals with a local bank, which in turn deals with a major bank or head office. The interbank foreign exchange market exists between the major banks either directly or indirectly via a broker.
