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Forex or Foreign exchange is the name given to the market for currencies. It is widely acknowledged as the largest and the most liquid financial market in the world and includes trading between governments, coorporations, currency speculators and banks. . In this market, a quantity of one currency is purchased in exchange for paying a quantity of another. According to the Bank for International Settlement, the everyday volume of the global forex was US$3.98 trillion in April 2007 and is continously growing everyday. Trading in world main financial market comprises almost $3.21 trillion of the total.
There are a large number of factors which make this market unique. The extreme liquidity of the market, its titanic trading volume, variety of traders and geographical dispersion are some of the major reasons. Not to mention, it has extreme long trading hours: 24 hours a day on all the weekdays.
The $3.98 trillion turnover can be segmented into different modules on the basis of location of the turnover. 34.1% of the total (around $1.36trillion) trading is accounted for in London making it the global hub of forex.Trading in New York accounts for 16.6%, and Tokyo accounts for 6.0% making them the second and third most busy centers for global exchange.Along with the traditional trading, around $2.1 trillion is traded in derivatives. Due to the growing importance of forex as an asset class and an increase in fund management assests, the foreign exchange has continously grown rapidly, more so between April 2005-2006 and has almost doubled since 2001.
Foreign exchange doesn’t have a central exchange or clearing house since forex is an over-the-counter market, i.e., finance market where the dealers and brokers negotiate directly with each other.International banks regularly provide the market with both bid and ask prices.The bid is basically the difference between the price at which the bank is willing to sell and the price at which the wholesale customer will buy. This difference is the least for the most actively traded pair.s of currencies. 73% of the trading volume is accounted for by the ten most active traders in the market.
The forex is divided into a number of levels of access. At the apex of the heirarchy is the inter-bank market which includes the largest investment banking firms.They notch upto 53% of all the transactions. The spreads here are razor sharp and usually unavailable, that is, they are not for public knowledge and not known to players beyond the inner circle. If any trader can assure a greater number of transactions for a higher price, they can demand a better spread. Below the investment banks, there are the smaller investement banks followed by the large multi-national corporations, large hedge funds and some retail forex metal market makers.
