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The FX Market

The world's largest, most liquid market The foreign exchange, or forex market, is the largest and most liquid market in the world, with worldwide turnover estimated at $1.9 trillion a day, yet it is not a physical place in the way that the TSX is. The forex market is a worldwide network of traders linked to each other through computers and telephones. The main participants in the FX market are central banks, commercial banks, other financial institutions, corporate customers, and brokers.
	Traders constantly quote “bid” (buy) and “ask” (sell) prices to each other so that exchange rates are in constant flux. Active trading in a major currency pair, for example the EUR/USD, which represents about 30% of the total FX market, will generate new price quotes every three or four seconds. The most active exchange rates can change up to 18,000 times in a single day. Trades in the hundreds of millions of dollars are not uncommon.
In spite of the constant changes in rates, it remains true that at any given moment, the exchange rates of major currencies tend to be virtually identical in all of the financial centers where there is active trading. In pricing, the various financial centres that are open for business and active at any one time are effectively integrated into a single market. This is why a US bank is just as likely to trade with a London or Zurich bank as with another American bank. The world’s largest foreign exchange trading centre is the UK, which accounts for approximately 32 percent of the global total. The US is second, with about 18 percent. Other major centres are Zurich, Frankfurt and Tokyo.
	The forex market virtually never closes The development of information technology has made the twenty-four hour market a reality in the last twenty-five years. Banks and financial institutions are trading around the clock in some part of the world, with some small gaps on weekends. The trading day begins in Australasia then moves across the globe to the Middle East, to Europe, and to North America. By the time North American markets close, the eastern markets are open again.
With markets open for twenty-four hours, market participants now have to find ways to monitor them in case a sharp move in an exchange rate occurs in “off” hours. Another effect of the twenty-four hour market is that traders can react immediately to market-influencing news such as interest rate hikes or government economic reports rather than waiting for the market to open. Traders can anticipate the news item’s impact on the exchange rate and take their positions accordingly. Though the markets are technically open around the clock, the busiest time of day for trading is when both the London and New York markets are open, i.e., when it’s morning in NY and afternoon in London.
	The five major currencies traded Despite the foreign exchange market’s global reach and activity, most trade transactions occur among a small group of currencies, confined mainly to the US dollar (USD), English pound (GBP), Euro (EUR), Japanese yen (JPY), and Swiss Franc (CHF). The overwhelmingly dominant currency, involved in close to 90 percent of all transactions, is the USD. In fact, the most widely used ways of expressing foreign exchange rates use the USD as either denominator or numerator. A foreign exchange quote expressed as USD/CND at 1.4300 means that one U.S. dollar can be exchanged for 1.43 Canadian dollars. The reverse of this is CND/US at 0.8650, meaning that one Canadian dollar can be exchanged for 0.8650 USD.
	Basis points The standard expression of a foreign exchange rate is by way of a whole number followed by 4 decimal points. Each such 0.0001 is called a basis point. If an exchange rate goes from 1.4510 to 1.4560, the currency is said to have changed by 50 basis points, where a basis point is defined as 1/100 of a percent (0.01%). Fifty basis points is therefore .5%.

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