Fei Su¹, Jun Zhao²

Electronic trading has transformed foreign exchange markets over the past decade, and the pace of innovation accelerates. This formerly two-tier market (namely, the interdealer and customer market) is now evolving into a multi-tier market and transaction costs are only a fraction of their former level. Entirely new agents have joined the fray, including retail and high-frequency traders, while foreign exchange trading volumes have almost tripled to 5.3 trillion dollars daily according to Bank for International Settlements 2013. Market concentration among dealers has risen reflecting the heavy investments in technology. This paper outlines the players in this market and the structure of their interactions. It also presents new evidence on how that structure has changed over the past two decades. Throughout, it highlights issues relevant to market regulation and exchange rate modelling.

foreign exchange market, institutional structure, regulation, policy implication