The U.S. money market is a huge and major part of the nation's financial system in which banks and other participants trade hundreds of billions of dollars every working day. It is a wholesale market for low-risk, highly liquid, short-term debt instruments. They include short term U.S. Treasury and federal agency debt, negotiable bank CDs, bank deposit notes, bankers' acceptances, short-term participations in bank loans, municipal notes, commercial paper, Federal funds, and Eurodollars.
The heart of the money market is in the trading rooms of dealers and brokers. In truth it is not one market but several markets for distinct and different instruments which nevertheless have close interrelationships. A notable feature is the speed of transactions involving hundred million dollar blocks and the trust that exists among the traders. Trades are negotiated by phone or computer terminal within seconds and no one reneges. The motto is: my word is my bond.
Borrowers in the market include domestic and foreign banks, the Treasury, corporations of all types, the Federal Home Loan Banks and other federal agencies, dealers in money market instruments, and many states and municipalities. The lenders include most of the above plus insurance companies, pension funds, and various other financial institutions.
The money market accomplishes several vital functions. One is shifting vast sums of money between banks. This is required because most large banks need more funds than they obtain in deposits, whereas many smaller banks have more deposits than they can profitably use internally. The money market also provides a means by which funds of cash-rich corporations and other institutions can be funneled to banks that need short-term money.
The money market is where the U.S. Treasury can sell huge quantities of debt with ease. It is also where the Fed carries out its open market operations to control interest rates and provide for growth of the money supply. The market is where participants determine the term structure of short term interest rates affecting the yields on Treasury bills and commercial paper of different maturities. It has also become an international short-term capital market where much of the dollar denominated trade by foreign entities is financed.
For details about market participants, instruments, and trading methods in the money market, Stigum's book is highly recommended.