The Forex market refers to the market where participants buy, sell, exchange, and speculate on currencies. It consists of banks, investors, commercial companies, investment firms or forex brokerages. Also known as forex or currency market, it is said to be the largest financial market where more than $5 trillion are traded daily. Futures and equity markets combined, do not reach this number
A single market exchange does not dominate the forex market. However, a global network of computers and brokers worldwide does. Forex brokers can influence prices as they can use bid and ask prices regarding a currency pair that are not at all similar to other competitive prices in the market. Two levels make up the FX world market; the interbank market and the over-the-counter (OTC) market. In the former, currencies are traded by large banks for hedging, balance sheet adjustments, or on behalf of clients. In the latter, individuals trade via online platforms and brokerages.
Hours of Operation
The FX market is a 24-hour market which means that trading occurs overnight. Everything starts from Monday morning in Asia to Friday afternoon in New York. This, however, is different in other markets such as equities and commodities, which close for a small period of time.
The most frequently traded currency is the US dollar (USD), with almost 85% of all trades. The euro (EUR) comes second with 39% and then the Japanese Yen (JPY) with 19%. Citigroup and JPMorgan Chase & Co. were the largest banks of this market, with more than 30% of market share globally.
The leverage provided through the forex market is the highest traders and investors can find. Leverage is actually money investors can borrow from a broker to increase their trade size, which could lead to potentially higher profits. However, there are always risks involved.
The foreign exchange market is different from the other markets, such as the stock market, in the sense that it has less rules or strict regulations, no traditional fees or commissions involved, and no central bodies to oversee it. However, there is the ability to trade anytime with no cut-off time. Finally, traders have the opportunity to get in and out whenever they please and they can buy as many currencies as they want depending on the balance of their account and on the rules of leverage.
The foreign exchange market is perhaps the most actively traded market globally. Its trading volume exceeds global equities’ trading volumes by 25 times. Trading takes place on electronic platforms or through telephone among banks or other market participants. Today almost 3% of foreign exchange transactions happens on futures and options contracts. The FX market gives traders and investors flexibility and ease while trading.
The FX market is a development of older systems of currency exchange. Once the system of precious metals collapsed and replaced by the Bretton Woods agreement after the second World War, three international organisations were created to make economic activity globally easier. These were the International Monetary Fund (IMF), General Agreement on Tariffs and Trade (GATT), and the International Bank for Reconstruction and Development (IBRD).
With the new system, gold was replaced by the US dollar as a peg for international currencies. The US government also promised to back up dollar supplies with the corresponding gold reserves. However, when the US president Richard Nixon announced suspension of the dollar’s convertibility into gold for a short period of time, the Bretton Woods system became redundant. Currencies’ value is now determined by supply and demand in international markets.