Improvement Of China's Interbank Foreign Exchange Market Trading Mechanism

With the development of the reform of the RMB exchange rate forming mechanism, the market maker system was introduced comprehensively to the China inter-bank foreign exchange market at the beginning of 2006. The market maker system really has positive impact on the RMB exchange rate reform and China foreign exchange market.This paper starts with price formation mechanism, the core of trading system, as it influences the price fluctuation in the foreign exchange market. Then, the paper makes an analysis and comparison between market maker model and auction model, regarding to market running mechanisms and market performance. Through the study of trading systems of different markets in the world, such as NASDAQ and LSE, it can be easily understood that these two models are not incompatible, and they can match with each other very well. On the basis of above analysis, the paper puts forward suggestions to improve the market maker model which is working on China foreign exchange interbank market, and also to the reconstruction and development of old fashion auction model.