Market Maker Behavior In Foreign Exchange Market

With the market economy developing continually, the structural disadvantages of china's inter-bank foreign exchange market is standing out gradually. The intervening pressure of PBC is increasing and intervening cost is very high for central bank. Since July 21, 2005, China has re-tied the RMB exchange rate to a group of foreign currencies including US dollar and Euro dollar and more flexible exchange rate mechanism is being formed. SAFE announced that market maker system would be brought into china's inter-banks'foreign market, which shows that with the reform of the RMB exchange rate forming mechanism processing, foreign exchange mechanism is on its way. The market maker system for RMB against US dollar will have positive impact on the RMB exchange rate reform and the foreign exchange market. Market maker system was brought into Euro against US dollar exchange in china's inter-banks'foreign market as experimental unit in 2002. and this was in due form in November 2005. The number of the market maker was increasing from 13 to 16, and five banks also got warrants as market maker form the regulation sect. in December 2006, and another one got warrant in January this year. So the total number comes to 22.The advantages of foreign exchange market maker are:1,to ensure efficiency of market operation;2,to ensure liquidity of transaction activities;3,to relieve fluctuation of exchange rate;4,to act as price discovering.After carrying out this system, fluctuation of RMB exchange rate behaves more flexible, the effect of market supply-demand in price discovering is enhanced. The introduction of market maker system into China's foreign exchange market is a complement to price-order-driven system, which do good to liquidity and bringing in market economy of foreign exchange market.