A money market exchange is a short-term financial market where investors trade stocks and bonds that mature within a year or less. Collectively, money market exchanges do more than $1 billion in transactions daily. Traders include banks, corporations, government entities, the U.S. Treasury and individuals, according to the Federal Reserve Bank of San Francisco.
Entities with extra cash on hand can lend funds on a short-term basis to those with needs for short-term loans via a money market exchange. In general, this type of financial market offers a high level of security on principal funds, so risk is low, explains the Federal Reserve Bank of San Francisco. Because most money market exchanges take place over the telephone, investors do not typically pay high transaction fees. The assets involved in money market trades are liquid so they are convertible to cash without significant losses. Typically, the value of an average money market exchange is more than $1 million.
Types of assets involved in money market exchanges include federal funds, U.S. Treasury bills, commercial loans and certificates of deposit, or CDs, in amounts over $100,000, states the Federal Reserve Bank of San Francisco. In general, money market interest rates reflect those of federal funds. Therefore, investors cannot expect a financial windfall from such transactions, but the liquidity and security of money market trades provide significant benefits.