Foreign Exchange Market: What is its Market Size and Market Participants

Foreign exchange market decentralization characteristics make this particular market the most widely recognized global currency trading market. The whole purpose of the foreign exchange market is to function as a financial center 24 hours per day on weekdays, not just during the morning and afternoon trading times of Wall Street.

What is the premise of the foreign exchange market? Basically, its primary purpose is to facilitate the trading of currencies all over the world. For example, a US business is permitted to import British goods by paying in Pounds Sterling. Speculators, who trade for profit in the foreign exchange market, can also support their trade habits with this market.

How the Foreign Exchange Market Works

Foreign Exchange Market

During a typical foreign exchange market transaction, a party can purchase a quantity of one currency through paying in another currency. During the 1970s, when countries slowly shifted to floating exchange rates from the previous method of exchange rate, the modern foreign exchange market began forming. Here are just some of the reasons the foreign exchange market is unique.

High liquidity due to massive trading volume
Geographical dispersion
24-hour operation
Differing factors that affect exchange rates
The relative profits of low margins compared with other fixed income markets
The dispersion usage to enhance profit margins depending on the account size
Exchanges are instant, as transactions between the two currencies occur simultaneously

The Foreign Exchange Market Liquidity and Size

The foreign exchange market is probably the most liquid market in the financial world. Common trading entities include central and large banks, currency speculators, institutional investors, governments, corporations and retail investors. In the global foreign exchange and related markets, the average daily turnover grows continuously.

According to the Triennial Central Bank Survey in April 2010, the average daily turnover for the foreign exchange market was nearly $4 trillion US dollars, nearly double the number surveyed in 1998. $1.5 trillion was spotted in foreign exchange market transactions, and another $1.5 trillion was spotted in swaps and other currency derivatives.

The UK has accounted for some of the most influential foreign exchange trading, as they make up about 36.7% of the overall trading total. The United States comes in second at 17.9%, and Japan comes in third at 6.2%.

Most countries permit foreign exchange market derivative product trading. These developed countries have also acquired fully convertible capital accounts. Foreign exchange derivative products on their exchanges are not always permitted in some emerging countries in regards to the controls on capital accounts. In some emerging economies, foreign exchange derivative use is growing. Countries including South Africa, India and Korea have established currency futures exchanges as well, despite the fact that the capital account is controlled.

Participants in the Foreign Exchange Market

The foreign exchange market is divided into levels of access, unlike with the stock market. The inter-bank market is made up of securities dealers and large commercial banks, which are considered to hold the top-ranking access level. Bids and asking price, which are not known to players outside the inner circle, are known within the inter-bank market.

As you travel down the levels of access, the difference between bidding and asking price widens. For example, for currencies such as the Euro, the price changes from 0-1 pip to 1-2 pip, or “price interest point,” due to volume. For larger amounts, there is a smaller difference between the bidding and asking price, which will be granted if a trader can guarantee exceptional numbers of transactions. This is referred to as a “better spread.”

The smaller banks follow suit after seeing the actions of the bigger banks in the foreign exchange market. These are the large, multinational corporations, which need to pay employees in different countries and hedge risk. Central banks also align currencies to their economic needs by participating in the foreign exchange market.

Individual traders also participate in the foreign exchange market. Many individuals carry out trades using online software platforms. Even if you’re a start-up trader without much experience, you can still participate in the foreign exchange market. Some even consider this a more exciting prospect than regular day trading with stocks.

If you’re new to trading, you might check out the online webinars and tutorials available through your trading software. Some platforms try to educate their traders and help them take the guesswork out of trading, so that they make the most out of their time spent trading on the foreign exchange market.