History, Size, Location, and Users
As the world’s largest financial market, the forex trading market moves the global economy,
As the world’s largest financial market, the forex trading market moves the global economy,
sometimes seeing over USD $3 trillion traded each day.
Forex Market History
Historically, the forex trading market was reserved for central banks, commercial financial institutions, and multinational corporations. However, with the advent of web-based trading applications, small retail traders and even individuals can now participate directly in the forex market on equal footing with these large institutions.
The forex market is an inter-bank or inter-dealer network that was first established in 1971 when many of the world’s major currencies moved towards floating exchange rates (as opposed to fixed rates). It is considered an over-the-counter (OTC) market, meaning that transactions are conducted between two parties that agree to trade by phone or over an electronic network.
Forex Market Location and Hours
Unlike some equity stock markets, such as the New York Stock Exchange (NYSE) or the Chicago Options Board Exchange (CBOE), where options and futures are traded, OTC trades are not centralized in one location. Currently, London, England contributes the greatest share of transactions with over 32% of the total trades. Other trading centers—listed in order of volume— are New York, Tokyo, Zurich, Frankfurt, Hong Kong, Paris, and Sydney.
Since these trading centers cover most of the major time zones, the FX market is open 24 hours a day, five days a week. For example, traders in New York can start trading on Sunday evening when the market opens in Sydney, and continue trading around the clock as the other trading centers around the globe come online. The week finishes with New York closing at 4:30 PM EST on Friday and starts up again on Sunday evening, when Sydney reopens for trading.
Forex Market Size
The FX market has become the world’s largest financial market, sometimes seeing over USD $3 trillion traded each day. The NYSE—the world’s largest equity market—is dwarfed in comparison, reporting daily trading volumes in the USD $60–$80 billion range. Even when combining the US bond and equity markets, total daily volumes still do not come close to currency market figures.
The most commonly traded currencies are the US Dollar (USD), Euro (EUR), Japanese Yen (JPY), Great Britain Pound (GBP), Swiss Franc (CHF), Australian Dollar (AUD), and Canadian Dollar (CAD). The sheer volume of trading completed every day in the FX market makes it by far the most liquid and efficient market available. Because of the magnitude of trades, it is virtually impossible for individuals or companies to influence the exchange rate of the more commonly traded currencies through any form of open market operations. No single individual has the resources required to manipulate pricing through targeted buying or selling on the market.
Who Uses the Forex Market?
Individuals and organizations use the forex market at various times.
Consumers and Travelers
Consumers typically need to exchange currencies when they travel or purchase items from foreign vendors. While travelers go to banks or currency exchange offices to convert one currency (typically, their home currency) into another (often the currency of the country they intend to travel to) so they can pay for goods and services while abroad. Travelers need to be aware of exchange rates to ensure they receive a fair deal.
Consumers may purchase goods in a foreign country or over the Internet with their credit card, in which case the amount they pay in the foreign currency is converted to their home currency on their credit card statement.
Although each consumer currency exchange is a relatively small transaction, the aggregate of all such transactions is significant.
Businesses
Businesses typically need to convert currencies when they work outside their home country. For example, if they export goods to another country and receive payment in that foreign currency, then the payment must typically be converted back to the home currency. Similarly, if they have to import goods or services, then businesses will often have to pay in a foreign currency, requiring them to first convert their home currency.
Large companies convert huge amounts of currency; for example, a company such as General Electric (GE) converts tens of billions of dollars each year. The timing of when they convert can have a large effect on their balance sheet and bottom line. To offset the potential negative effects of currency market volatility and ensure they do not incur losses over time, many businesses use hedging strategies.
Investors and Speculators
Investors and speculators require currency exchange whenever they trade in any foreign investment, be it equities, bonds, bank deposits, or real estate. For example, when Swedish investors buys shares in Sun Microsystems on the NASDAQ, they will have to pay for the shares in U.S. dollars, likely converting Swedish Krona to USD in the process. Similarly, a Japanese real estate investor who sells a New York property may want to convert the proceeds of the sale in U.S. dollars to Japanese yen.
Investors and speculators also trade currencies directly in order to benefit from movements in the currency exchange markets. For example, if an American investor believes that the Japanese economy is strengthening and, as a result, expects the Japanese yen to appreciate in value (go up relative to other currencies), then she may want to buy Japanese yen and take what is referred to as a long position. Similarly, if an American investor believes that the euro will go down over time, then she may want to sell euro to take a short position. Interestingly, investors and speculators can profit equally from currencies becoming stronger (by taking a long position) or from currencies becoming weaker (by taking a short position).
Speculators are often day traders, trying to take advantage of market movements in very short time periods, buying a currency and then selling it again within hours or even minutes. They are attracted to currency trading for numerous reasons:
The size and daily volatility of the market, which provides some individuals with an unparalleled level of excitement.
The almost perfect liquidity of the currency exchange market.
The fact that the currency exchange market is "open" 24 hours a day.
The fact that currencies can be traded with no brokerage charges.
Historically, the forex trading market was reserved for central banks, commercial financial institutions, and multinational corporations. However, with the advent of web-based trading applications, small retail traders and even individuals can now participate directly in the forex market on equal footing with these large institutions.
The forex market is an inter-bank or inter-dealer network that was first established in 1971 when many of the world’s major currencies moved towards floating exchange rates (as opposed to fixed rates). It is considered an over-the-counter (OTC) market, meaning that transactions are conducted between two parties that agree to trade by phone or over an electronic network.
Forex Market Location and Hours
Unlike some equity stock markets, such as the New York Stock Exchange (NYSE) or the Chicago Options Board Exchange (CBOE), where options and futures are traded, OTC trades are not centralized in one location. Currently, London, England contributes the greatest share of transactions with over 32% of the total trades. Other trading centers—listed in order of volume— are New York, Tokyo, Zurich, Frankfurt, Hong Kong, Paris, and Sydney.
Since these trading centers cover most of the major time zones, the FX market is open 24 hours a day, five days a week. For example, traders in New York can start trading on Sunday evening when the market opens in Sydney, and continue trading around the clock as the other trading centers around the globe come online. The week finishes with New York closing at 4:30 PM EST on Friday and starts up again on Sunday evening, when Sydney reopens for trading.
Forex Market Size
The FX market has become the world’s largest financial market, sometimes seeing over USD $3 trillion traded each day. The NYSE—the world’s largest equity market—is dwarfed in comparison, reporting daily trading volumes in the USD $60–$80 billion range. Even when combining the US bond and equity markets, total daily volumes still do not come close to currency market figures.
The most commonly traded currencies are the US Dollar (USD), Euro (EUR), Japanese Yen (JPY), Great Britain Pound (GBP), Swiss Franc (CHF), Australian Dollar (AUD), and Canadian Dollar (CAD). The sheer volume of trading completed every day in the FX market makes it by far the most liquid and efficient market available. Because of the magnitude of trades, it is virtually impossible for individuals or companies to influence the exchange rate of the more commonly traded currencies through any form of open market operations. No single individual has the resources required to manipulate pricing through targeted buying or selling on the market.
Who Uses the Forex Market?
Individuals and organizations use the forex market at various times.
Consumers and Travelers
Consumers typically need to exchange currencies when they travel or purchase items from foreign vendors. While travelers go to banks or currency exchange offices to convert one currency (typically, their home currency) into another (often the currency of the country they intend to travel to) so they can pay for goods and services while abroad. Travelers need to be aware of exchange rates to ensure they receive a fair deal.
Consumers may purchase goods in a foreign country or over the Internet with their credit card, in which case the amount they pay in the foreign currency is converted to their home currency on their credit card statement.
Although each consumer currency exchange is a relatively small transaction, the aggregate of all such transactions is significant.
Businesses
Businesses typically need to convert currencies when they work outside their home country. For example, if they export goods to another country and receive payment in that foreign currency, then the payment must typically be converted back to the home currency. Similarly, if they have to import goods or services, then businesses will often have to pay in a foreign currency, requiring them to first convert their home currency.
Large companies convert huge amounts of currency; for example, a company such as General Electric (GE) converts tens of billions of dollars each year. The timing of when they convert can have a large effect on their balance sheet and bottom line. To offset the potential negative effects of currency market volatility and ensure they do not incur losses over time, many businesses use hedging strategies.
Investors and Speculators
Investors and speculators require currency exchange whenever they trade in any foreign investment, be it equities, bonds, bank deposits, or real estate. For example, when Swedish investors buys shares in Sun Microsystems on the NASDAQ, they will have to pay for the shares in U.S. dollars, likely converting Swedish Krona to USD in the process. Similarly, a Japanese real estate investor who sells a New York property may want to convert the proceeds of the sale in U.S. dollars to Japanese yen.
Investors and speculators also trade currencies directly in order to benefit from movements in the currency exchange markets. For example, if an American investor believes that the Japanese economy is strengthening and, as a result, expects the Japanese yen to appreciate in value (go up relative to other currencies), then she may want to buy Japanese yen and take what is referred to as a long position. Similarly, if an American investor believes that the euro will go down over time, then she may want to sell euro to take a short position. Interestingly, investors and speculators can profit equally from currencies becoming stronger (by taking a long position) or from currencies becoming weaker (by taking a short position).
Speculators are often day traders, trying to take advantage of market movements in very short time periods, buying a currency and then selling it again within hours or even minutes. They are attracted to currency trading for numerous reasons:
The size and daily volatility of the market, which provides some individuals with an unparalleled level of excitement.
The almost perfect liquidity of the currency exchange market.
The fact that the currency exchange market is "open" 24 hours a day.
The fact that currencies can be traded with no brokerage charges.
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