The foreign exchange market is unique because of
its trading volumes,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 3pm EST on Sunday until 4pm EST Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the BIS,[1] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this.
This $3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in forex swaps
$129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.
In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Thursday, August 21, 2008
Forex Trande
A legacy of innovation and entrepreneurshipIn the late 1990s, a group of American entrepreneurs saw the future oftrading. Over-the-counter (or “off exchange”) foreign exchange tradingwas generating significant profits for large banks and corporationsand, likewise, it lured individual traders who were increasinglybecoming interested in participating in this large, but seeminglyclosed, market.However, individuals with relatively small capital and no access toproprietary bank-to-bank computer systems were only able to tradecurrencies as futures through two exchanges. There was no method fortraders to participate in the over-the-counter (OTC) forex market. Therapid pace of the currency market made it very difficult to trade onexchange, as most exchanges still traded currencies in the pit – anage-old system requiring multiple interactions to place a single trade.In addition, there were only a handful of currency markets available totrade, with inconsistent pricing and trading volumes. The pricingspreads fluctuated to widen significantly during times of increasedmarket volatility, and market liquidity was not sufficient forovernight trading.Meanwhile, Internet technologies were making rapid advances, and smallupstarts recognized that these new technologies could solve the servicedelays and other problems faced when trading currencies with exchanges.These entrepreneurs became forex dealers who saw the Internet as anideal avenue to provide customers with what they needed – instant andefficient access to the rapidly moving currency markets.Creating and sustaining American jobsThe global forex industry has boosted the national economy by trainingand employing a domestic workforce of thousands. In a globalmarketplace where Americans struggle to compete for high-tech jobs,American forex dealers lead the world in this fast-growing industry,outpacing other firms based in Europe, Japan and Australia. TheAmerican firms are regarded as the leaders in the industry, hiringhighly-coveted, knowledge-based workers who contribute to the economy’sbottom line.Since 2001, FXDC members have added an estimated 1,500 employees totheir companies in the United States alone. The size of the industry inthe United States is estimated to be more than $8.7 trillion.[3]Forex dealers have built workplace environments and cultures that rival– or even outshine – many traditional big name companies. Many of thejobs are high-end service jobs that rely on knowledge-based employeestrained on complex financial transactions and skills that allow U.S.companies to compete and lead in the global financial arena.Forex dealers primarily rely on customers outside of the United States,with upward of 70 percent of all customers coming from more than 140countries. International customers must go through a stringentaccount-opening process, which includes depositing money in U.S. banks.These international deposits mean that tens of millions of dollars areflowing to the U.S. banking industry each day. In fact, it is estimatedthat the banks of forex dealers held $1.3 billion n customer depositsin 2007 alone.Government and self-regulationFor many years, the foreign exchange industry was unregulated in theUnited States. Regulation was long overdue, especially in light of thefact that foreign exchange trading had been regulated in such localesas Hong Kong and London for over a decade. Some rules were formally putin place when the President signed and Congress passed the CommoditiesFutures Modernization Act[4] in December of 2000, which regulated theretail foreign exchange industry for the first time.In the U.S., forex firms [5]are members of the CFTC [6]and theself-regulating National Futures Association (NFA) [[7]], operatingunder the same guidelines set forth for FCMs in the futures brokeragebusiness. As part of a global financial community, leading forexdealing firms [8][9][10][11]are also regulated in multiple countrieswithin five continents. Each firm welcomes regulation and adheres tostrict global and local guidelines and net capital requirements toensure that all business operations meet necessary rules andregulations. Other developed countries have effectively regulated theOTC foreign exchange market, and each member believes that the U.S. cando this as well.On a regular basis, all forex dealers submit financial reports to itsregulators and are subject to lengthy regulatory audits coveringeverything from marketing practices to employee training regimens. Inaddition, many of these long-established regulatory bodies extendspecific regulations solely to retail forex dealers[12], such as highercapital requirements[13], disclosure statements and the requirementthat all dealers disclose to customers that their funds may not be safein the event of bankruptcy.Posted by helloSubscribe to: Posts (Atom)Forex DealersWhat is a forex dealer?A forex dealer provides online trading services to allow individuals tospeculate on rapidly changing foreign exchange rates. Forex DealerMembers (FDMs) are regulated by the CFTC and National FuturesAssociation in the United States, as well as by national and localregulatory bodies where they conduct business, and are held tostringent business and ethical standards.How does forex trading work?Many U.S. and international companies provide online trading softwareand services for individuals (traders) who want to speculate on theexchange rate differences between two currencies. In doing so, thesespeculators buy or sell currencies with the objective of making aprofit when the value of the currencies changes in their favor, whetherthose fluctuations derive from market news, supply and demandprinciples, or geo-political events taking place throughout the world.In addition, the forex market is available to trade 24 hours a day, 5.5days a week, allowing traders more freedom to trade when they want to,not just when an exchange is open.Popularity of forex trading.The growth of trading OTC foreign exchange (known as retail FX orretail forex trading) has more than doubled from 2004 to 2007. Manyfinancial experts suggest this growth curve is projected to continuewell beyond 2010. What has led to this phenomenal growth? Innovation,competition and consumer demand.The public has recognized U.S. forex companies as leaders intechnology, with three of the leading forex firms named to the DeloitteTechnology Fast 500[1], a highly regarded ranking of the top NorthAmerican technology companies, for three consecutive years. The leadingU.S. forex companies have also been named to the Inc. 500 list of thecountry’s fastest growing companies. In 2006, the top FX companies madeup nearly 20 percent of the total number of financial services industryfirms on the Inc. 500 list[2]. It is apparent that Americans haveembraced this growing market, making foreign exchange one of thefastest growing industries in the United States.surance
Forex Trand
A legacy of innovation and entrepreneurshipIn the late 1990s, a group of American entrepreneurs saw the future oftrading. Over-the-counter (or “off exchange”) foreign exchange tradingwas generating significant profits for large banks and corporationsand, likewise, it lured individual traders who were increasinglybecoming interested in participating in this large, but seeminglyclosed, market.However, individuals with relatively small capital and no access toproprietary bank-to-bank computer systems were only able to tradecurrencies as futures through two exchanges. There was no method fortraders to participate in the over-the-counter (OTC) forex market. Therapid pace of the currency market made it very difficult to trade onexchange, as most exchanges still traded currencies in the pit – anage-old system requiring multiple interactions to place a single trade.In addition, there were only a handful of currency markets available totrade, with inconsistent pricing and trading volumes. The pricingspreads fluctuated to widen significantly during times of increasedmarket volatility, and market liquidity was not sufficient forovernight trading.
US Forex
Since 2001, FXDC members have added an estimated 1,500 employees totheir companies in the United States alone. The size of the industry inthe United States is estimated to be more than $8.7 trillion.[3]Forex dealers have built workplace environments and cultures that rival– or even outshine – many traditional big name companies. Many of thejobs are high-end service jobs that rely on knowledge-based employeestrained on complex financial transactions and skills that allow U.S.companies to compete and lead in the global financial arena.Forex dealers primarily rely on customers outside of the United States,with upward of 70 percent of all customers coming from more than 140countries. International customers must go through a stringentaccount-opening process, which includes depositing money in U.S. banks.These international deposits mean that tens of millions of dollars areflowing to the U.S. banking industry each day. In fact, it is estimatedthat the banks of forex dealers held $1.3 billion n customer depositsin 2007 alone.
Goverment-Forex Trade
Government and self-regulationFor many years, the foreign exchange industry was unregulated in theUnited States. Regulation was long overdue, especially in light of thefact that foreign exchange trading had been regulated in such localesas Hong Kong and London for over a decade. Some rules were formally putin place when the President signed and Congress passed the CommoditiesFutures Modernization Act[4] in December of 2000, which regulated theretail foreign exchange industry for the first time.In the U.S., forex firms [5]are members of the CFTC [6]and theself-regulating National Futures Association (NFA) [[7]], operatingunder the same guidelines set forth for FCMs in the futures brokeragebusiness. As part of a global financial community, leading forexdealing firms [8][9][10][11]are also regulated in multiple countrieswithin five continents. Each firm welcomes regulation and adheres tostrict global and local guidelines and net capital requirements toensure that all business operations meet necessary rules andregulations. Other developed countries have effectively regulated theOTC foreign exchange market, and each member believes that the U.S. cando this as well.
How Forex Trade?
How does forex trading work?Many U.S. and international companies provide online trading softwareand services for individuals (traders) who want to speculate on theexchange rate differences between two currencies. In doing so, thesespeculators buy or sell currencies with the objective of making aprofit when the value of the currencies changes in their favor, whetherthose fluctuations derive from market news, supply and demandprinciples, or geo-political events taking place throughout the world.In addition, the forex market is available to trade 24 hours a day, 5.5days a week, allowing traders more freedom to trade when they want to,not just when an exchange is open.Popularity of forex trading.The growth of trading OTC foreign exchange (known as retail FX orretail forex trading) has more than doubled from 2004 to 2007. Manyfinancial experts suggest this growth curve is projected to continuewell beyond 2010. What has led to this phenomenal growth? Innovation,competition and consumer demand.
Our Forex
A legacy of innovation and entrepreneurshipIn the late 1990s, a group of American entrepreneurs saw the future oftrading. Over-the-counter (or “off exchange”) foreign exchange tradingwas generating significant profits for large banks and corporationsand, likewise, it lured individual traders who were increasinglybecoming interested in participating in this large, but seeminglyclosed, market.However, individuals with relatively small capital and no access toproprietary bank-to-bank computer systems were only able to tradecurrencies as futures through two exchanges. There was no method fortraders to participate in the over-the-counter (OTC) forex market. Therapid pace of the currency market made it very difficult to trade onexchange, as most exchanges still traded currencies in the pit – anage-old system requiring multiple interactions to place a single trade.In addition, there were only a handful of currency markets available totrade, with inconsistent pricing and trading volumes. The pricingspreads fluctuated to widen significantly during times of increasedmarket volatility, and market liquidity was not sufficient forovernight trading.Meanwhile, Internet technologies were making rapid advances, and smallupstarts recognized that these new technologies could solve the servicedelays and other problems faced when trading currencies with exchanges.These entrepreneurs became forex dealers who saw the Internet as anideal avenue to provide customers with what they needed – instant andefficient access to the rapidly moving currency markets.
Forex News
Foreign exchange marketThe foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is over US$ 3 trillion.Posted by anky at 1:05 AM 2 comments Market size and liquidityThe foreign exchange market is unique because of:1. its trading volumes, 2.the extreme liquidity of the market, 3.the large number of, and variety of, traders in the market, 4.its geographical dispersion, 5.its long trading hours: 24 hours a day except on weekends (from 5pm EST on Sunday until 4pm EST Friday), 6.the variety of factors that affect exchange rates. 7.the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes) 8.the use of 'leverage' (where a small amount of money can be used to buy a large investment. I.e £10 with a leverage of 1:50 gives you £500 to invest. This gives the potential for much larger profits and, more importantly, larger losses). Foreign exchange market turnover, 1988 - 2007, measured in billions of USD.As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the BIS,[1] average daily turnover in traditional foreign exchange markets is estimated at $3.21 trillion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below:This $3.21 trillion in global foreign exchange market "traditional" turnover was broken down as follows:1> $1,005 billion in spot transactions 2> $362 billion in outright forwards 3> $1,714 billion in forex swaps 4> $129 billion estimated gaps in reporting In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe.Average daily global turnover in traditional foreign exchange market transactions totaled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms offered by companies such as First Prudential Markets and Saxo Bank have made it easier for retail traders to trade in the foreign exchange market. Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006. The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of currency, which is a standard "lot".These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.
Thursday, August 14, 2008
Forex Market
Market participants
Financial markets
Bond marketFixed incomeCorporate bondGovernment bondMunicipal bondBond valuationHigh-yield debt
Stock marketStockPreferred stockCommon stockRegistered shareVoting shareStock exchange
Foreign exchange market
Derivatives marketCredit derivativeHybrid securityOptionsFuturesForwardsSwaps
Other MarketsCommodity marketMoney marketOTC marketReal estate marketSpot market
Finance seriesFinancial marketFinancial market participantsCorporate financePersonal financePublic financeBanks and BankingFinancial regulation
v • d • e
Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.
[edit] Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
[edit] Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
[edit] Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[4] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
[edit] Hedge funds
Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
[edit] Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
[edit] Retail forex brokers
There are two types of retail brokers offering the opportunity for speculative trading. Retail forex brokers or Market makers.Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks. Retail forex brokers, while largely controlled and regulated by the CFTC and NFA might be subject to forex scams[5] [6]. At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD(No Dealing Desk), And STP(Straight Through Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.
[edit] Other
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as Foreign Exchange Brokers but are distinct from Forex Brokers as they do not offer speculative trading but currency exchange with payments. i.e. there is usually a physical delivery of currency to a bank account.
It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies[7]. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
Money Transfer/Remittance Companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.
[edit] Trading characteristics
Most traded currencies[1]Currency distribution of reported FX market turnover
Rank
Currency
ISO 4217 code(Symbol)
% daily share(April 2007)
1
United States dollar
USD ($)
86.3%
2
Euro
EUR (€)
37.0%
3
Japanese yen
JPY (¥)
16.5%
4
Pound sterling
GBP (£)
15.0%
5
Swiss franc
CHF (Fr)
6.8%
6
Australian dollar
AUD ($)
6.7%
7
Canadian dollar
CAD ($)
4.2%
8-9
Swedish krona
SEK (kr)
2.8%
8-9
Hong Kong dollar
HKD ($)
2.8%
10
Norwegian krone
NOK (kr)
2.2%
11
New Zealand dollar
NZD ($)
1.9%
12
Mexican Peso
MEX ($)
1.3%
Other
16.8%
Total
200%
There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called FxMarketSpace opened in 2007 and aspires to the role of a central market clearing mechanism.
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
EUR/USD: 27 %
USD/JPY: 13 %
GBP/USD (also called sterling or cable): 12 %
and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), and sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.
Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.
[edit] Factors affecting currency trading
See also: Exchange rates
Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
[edit] Economic factors
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Economic conditions include:
Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
Financial markets
Bond marketFixed incomeCorporate bondGovernment bondMunicipal bondBond valuationHigh-yield debt
Stock marketStockPreferred stockCommon stockRegistered shareVoting shareStock exchange
Foreign exchange market
Derivatives marketCredit derivativeHybrid securityOptionsFuturesForwardsSwaps
Other MarketsCommodity marketMoney marketOTC marketReal estate marketSpot market
Finance seriesFinancial marketFinancial market participantsCorporate financePersonal financePublic financeBanks and BankingFinancial regulation
v • d • e
Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.
[edit] Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
[edit] Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
[edit] Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[4] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
[edit] Hedge funds
Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
[edit] Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
[edit] Retail forex brokers
There are two types of retail brokers offering the opportunity for speculative trading. Retail forex brokers or Market makers.Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks. Retail forex brokers, while largely controlled and regulated by the CFTC and NFA might be subject to forex scams[5] [6]. At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD(No Dealing Desk), And STP(Straight Through Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.
[edit] Other
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as Foreign Exchange Brokers but are distinct from Forex Brokers as they do not offer speculative trading but currency exchange with payments. i.e. there is usually a physical delivery of currency to a bank account.
It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies[7]. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
Money Transfer/Remittance Companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.
[edit] Trading characteristics
Most traded currencies[1]Currency distribution of reported FX market turnover
Rank
Currency
ISO 4217 code(Symbol)
% daily share(April 2007)
1
United States dollar
USD ($)
86.3%
2
Euro
EUR (€)
37.0%
3
Japanese yen
JPY (¥)
16.5%
4
Pound sterling
GBP (£)
15.0%
5
Swiss franc
CHF (Fr)
6.8%
6
Australian dollar
AUD ($)
6.7%
7
Canadian dollar
CAD ($)
4.2%
8-9
Swedish krona
SEK (kr)
2.8%
8-9
Hong Kong dollar
HKD ($)
2.8%
10
Norwegian krone
NOK (kr)
2.2%
11
New Zealand dollar
NZD ($)
1.9%
12
Mexican Peso
MEX ($)
1.3%
Other
16.8%
Total
200%
There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called FxMarketSpace opened in 2007 and aspires to the role of a central market clearing mechanism.
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
EUR/USD: 27 %
USD/JPY: 13 %
GBP/USD (also called sterling or cable): 12 %
and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), and sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.
Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.
[edit] Factors affecting currency trading
See also: Exchange rates
Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
[edit] Economic factors
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Economic conditions include:
Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
What is Forex
Foreign exchange market
From Wikipedia, the free encyclopedia
(Redirected from Forex)
Jump to: navigation, search
This article needs additional citations for verification.Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (July 2008)
Foreign exchange
Exchange ratesCurrency bandExchange rateExchange rate regimeFixed exchange rateFloating exchange rateLinked exchange rate
MarketsForeign exchange marketFutures exchangeRetail forex
ProductsCurrencyCurrency futureNon-deliverable forwardForex swapCurrency swapForeign exchange option
See alsoBureau de change
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is the largest and most liquid financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is almost US$ 4 trillion.[1]
Contents[hide]
1 Market size and liquidity
2 Market participants
2.1 Banks
2.2 Commercial companies
2.3 Central banks
2.4 Hedge funds
2.5 Investment management firms
2.6 Retail forex brokers
2.7 Other
3 Trading characteristics
4 Factors affecting currency trading
4.1 Economic factors
4.2 Political conditions
4.3 Market psychology
5 Algorithmic trading in forex
6 Financial instruments
6.1 Spot
6.2 Forward
6.3 Future
6.4 Swap
6.5 Option
6.6 Exchange Traded Fund
7 Speculation
8 References
9 See also
10 External links
//
[edit] Market size and liquidity
The foreign exchange market is unique because of
its trading volumes,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 3pm EST on Sunday until 4pm EST Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the BIS,[1] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this.
This $3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in forex swaps
$129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.
In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Top 10 currency traders [2]% of overall volume, May 2008
Rank
Name
Volume
1
Deutsche Bank
21.70%
2
UBS AG
15.80%
3
Barclays Capital
9.12%
4
Citi
7.49%
5
Royal Bank of Scotland
7.30%
6
JPMorgan
4.19%
7
HSBC
4.10%
8
Lehman Brothers
3.58%
9
Goldman Sachs
3.47%
10
Morgan Stanley
2.86%
Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms offered by companies such as First Prudential Markets and Saxo Bank have made it easier for retail traders to trade in the foreign exchange market. [3]
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. RPP
The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of currency, which is a standard "lot".
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.
From Wikipedia, the free encyclopedia
(Redirected from Forex)
Jump to: navigation, search
This article needs additional citations for verification.Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (July 2008)
Foreign exchange
Exchange ratesCurrency bandExchange rateExchange rate regimeFixed exchange rateFloating exchange rateLinked exchange rate
MarketsForeign exchange marketFutures exchangeRetail forex
ProductsCurrencyCurrency futureNon-deliverable forwardForex swapCurrency swapForeign exchange option
See alsoBureau de change
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is the largest and most liquid financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is almost US$ 4 trillion.[1]
Contents[hide]
1 Market size and liquidity
2 Market participants
2.1 Banks
2.2 Commercial companies
2.3 Central banks
2.4 Hedge funds
2.5 Investment management firms
2.6 Retail forex brokers
2.7 Other
3 Trading characteristics
4 Factors affecting currency trading
4.1 Economic factors
4.2 Political conditions
4.3 Market psychology
5 Algorithmic trading in forex
6 Financial instruments
6.1 Spot
6.2 Forward
6.3 Future
6.4 Swap
6.5 Option
6.6 Exchange Traded Fund
7 Speculation
8 References
9 See also
10 External links
//
[edit] Market size and liquidity
The foreign exchange market is unique because of
its trading volumes,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 3pm EST on Sunday until 4pm EST Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the BIS,[1] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this.
This $3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in forex swaps
$129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.
In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Top 10 currency traders [2]% of overall volume, May 2008
Rank
Name
Volume
1
Deutsche Bank
21.70%
2
UBS AG
15.80%
3
Barclays Capital
9.12%
4
Citi
7.49%
5
Royal Bank of Scotland
7.30%
6
JPMorgan
4.19%
7
HSBC
4.10%
8
Lehman Brothers
3.58%
9
Goldman Sachs
3.47%
10
Morgan Stanley
2.86%
Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms offered by companies such as First Prudential Markets and Saxo Bank have made it easier for retail traders to trade in the foreign exchange market. [3]
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. RPP
The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of currency, which is a standard "lot".
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.
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