Definition of the Forex Market
The Forex Market, also known as the FX or Currency Market, is considered to be the largest and most liquid market in the world with over $5 trillion traded daily. This is more than the futures and equity markets combined. Traders can buy, sell, exchange, and speculate on currencies. The forex market consists of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors.
Larger international banks are the main participants in this market. Financial centres worldwide connect the wide range of multiple types of buyers with the sellers around the clock, except weekends. Currencies are always traded in pairs. Therefore, the foreign exchange market determines the currency’s relative value by setting the market price of one currency if paid for with another. For instance, US$1 is worth X CAD, or CHF, or JPY, etc.
What makes the Forex Market unique
There is no central marketplace to trade forex as currency trading happens electronically, over-the-counter (OTC) which means that all transactions occur online through a network of traders.
With approximately $5 trillion USD trading every day, the foreign exchange market is the most liquid in the world.
As a result, high volume currencies can be bought, while the market is open.
Forex Market in detail
The foreign exchange market is not a single market but rather an international network of brokers. The latter have a strong impact on the market as they may post bid and ask prices for a currency pair that is different from the most competitive bid in the market.
The interbank market and the over-the-counter (OTC) market make up the two levels of the forex market. The former is where large banks trade currencies for hedging, balance sheet adjustments, and on behalf of clients while the latter is where individuals trade through online platforms and brokers.
Most Traded Currencies
The most traded currency by far is the US dollar, reaching close to 85 percent of all trades. The Euro comes second, which is part of 39 percent of all currency trades, and the Japanese yen is third at 19 percent. According to the 2018 Greenwich Associates’ study, the two biggest banks in the forex market were Citigroup and JPMorgan Chase & Co., making up more than 30 percent of the global market share. The remaining places in the top 5 were made up by UBS, Deutsche Bank, and Goldman Sachs.
Origins of Forex Market
Before World War I, gold and silver were the most common currencies. However, after the
Second World War, the system collapsed and was replaced by the Bretton Woods agreement. As a result, three international organisations were created to facilitate economic activity globally. These were the International Monetary Fund (IMF), General Agreement on Tariffs and Trade (GATT), and the International Bank for Reconstruction and Development (IBRD).
Gold was also replaced with the US dollar as a peg for international currencies. The US government also promised to back up dollar supplies with equivalent gold reserves. Currency pairs are now free to choose their own peg and their value is determined by global market supply and demand.