Foreign Exchange trading, or Forex trading, is the practice of buying and selling a currency of a country. Currencies can be bought and sold for various reasons, anything from pure speculation on the moves in exchange rates to businesses or individuals needing to buy a currency for investment purposes.
It is a extremely lucrative and liquid market with a daily turnover of around $4 trillion USD. It is easily one of the largest and most volatile financial markets in the world.
Key Facts of The Forex Market
- Very high liquidity in the markets from the extreme volumes
- Long Forex trading hours, 24 hours a day from 22:00 GMT on Sunday to 22:00 GMT on Friday
- Use of leverage to earn greater profits
- London is the global center for FX, it account for about 35% of the total worldwide daily volume
- New York accounts for 17% of total volume with Tokyo at 6%
- Activity in Forex trading is growing rapidly, more than doubling since 2001
- Ten main institutions make up 80% of the entire market volume. Deutsche Bank makes up 20% of the total daily volume.
The Main participants In The Forex Market
Banks
Generally the biggest counter parties in trading as they trade on the back of their own proprietary trading accounts, corporations, funds and governments.
Commercial Companies
These are the type of companies that are exposed to foreign exchange in the paying or selling of their goods or services coming in from abroad. Foreign exchange will be used by them for either hedging or settlement of trading balances.
Central Banks
These are major contributors to the forex market. They use tools such as interest rates and fiscal policy to control inflation, money supply and the value of their currency. They can attempt to stabilize the market using their own reserves.
When trying to manipulate the markets they are limited by their own reserves and fear of going bankrupt.
Hedge funds and speculators
A common statistic is that 70%-90% of all Forex transactions are speculative, meaning the only reason the currency is bought or sold is to create a profit from the price fluctuations.
Hedge funds play a massive role using the power of leveraging (ie. using millions of dollars to trade billions). Big hedge funds are able to overwhelm central banks when they are attempting to intervene in the market.
Investment Management Firms
These are generally smaller participants. They invest money into markets from around the world and will require currency to purchase foreign assets. They are the type of institutional investor that invest on the behalf of others, such as pension funds.
(vi) Other players
Retail Forex brokers, non-bank Forex companies (offering Forex to private individuals and companies) and money transfer/remittance companies.
