The Foreign exchange market is totally unique; it is totally different to the organized exchange of the New York stock Exchange or London stock exchange. The traditional exchanges are located at one physical location. Members of the stock exchange (usually stock brokers) do all the buying and selling and report to the stock exchange. Then the exchange actually sees to the settlement of these transactions, makes sure the share certificates go to the buyers and the money to the sellers.
Back to the foreign exchange market, this does not have a stockbroker as such, the actual foreign exchange transactions are done “over the counter” between two parties. At the moment over 1.5 trillion dollars worth of business is exchanged per day based on trust between two parties.
Because it is not centralized and all transactions are not running through one institution there is not a global price at any one time for any currency. This means each transaction carried out between 2 parties is negotiated at that time. To make this clearer, each broker who you might deal with can have different prices and with various margins the offers will be different as well. If you are trading a small amount you might well be charged a higher price than another buyer who is dealing in hundreds of thousands or more.
As I mentioned before the size of the Forex market is huge compared with all other markets and because of this comes obvious advantages.
• Continuous and full liquidity…creates more movements
• Around the clock trading……..not waiting for the exchange to open.
• Around the globe trading……can trade any currency pairing
• High efficiency
• Price stability……impossible for people to change the pricing
The forex market has grown enormously over the last 40 years and is still growing. Most of the trading is done by dealers to dealers, and dealers to their clients. It is only a small % that is non speculative.
The main centre of the Forex Market is London, UK. This dates back to the history of London 200 years ago and their dominance of the money markets . The other important factor is the time zone for trading, we have the Asian market, US and European and the London market catches the end of the Asian day and also the beginning of the American day. Accordingly most trades are done during the time London is open. New York is the 2nd largest with Tokyo 3rd largest.
The other major point is the way the markets open around the world, as one time zone finishes another begins with a small overlap.
Let me explain.
The Forex market opens first in New Zealand, followed by Sydney Australia, followed by Tokyo, Hong Kong and Singapore. As Tokyo starts to close down the European markets open, and the European markets overlap the USA morning. As USA finishes, Auckland is close to opening and we start again.
The benefits of this for the Trader is you are not sitting around waiting for the market to open again after your 8 hour day in your particular time zone.
Hopefully this gives you a brief understand of the Foreign Exchange market.
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