Foreign exchange market
The Foreign Exchange Market
The Forex market, also known as Forex (abbreviation of the English term Foreign Exchange). FX or Currency Market, is a decentralized and global market in which currencies are traded.
This market was born with the objective of facilitating the monetary flow that is derived from international trade. It is by far the largest financial market in the world, moving a daily volume of transactions of about five trillion US dollars (USD), more than all the other stock markets on the planet combined.1 It has grown so much that , The total number of transactions in foreign currency due to international operations of goods and services represent a quasi-residual percentage, the majority of which are due to purchase and sale of financial assets.2 Consequently, this market is quite independent of the Real commercial operations and the variations between the price of two currencies can not be explained exclusively by the variations of trade flows.
According to the Bank for International Settlements, preliminary global results from the 2016 Triennial Banking and Foreign Exchange Derivatives Market Survey show that trade in foreign exchange markets averaged $ 5.09 trillion per day in April 2016. This Is less than $ 5.4 trillion
In April 2013, but compared to $ 4.0 trillion in April 2010. Measured by value, currency exchange rates were negotiated more than any other instrument in April 2016, at $ 2.4 trillion per Day, followed by cash trading at $ 1.7 trillion.
The breakdown of $ 5.09 trillion is as follows:
• $ 1,654 billion in spot transactions
• $ 700 billion in forwards
• $ 2,383 billion in foreign exchange swaps
• $ 96 billion of foreign exchange swaps
• $ 254 billion in options and other products
Market size and liquidity
The volume of transactions
• The extreme liquidity of the market.
• The large number and variety of market participants
• Its geographic dispersion
• The time in which it is operated - 24 hours a day (except on weekends).
• The change of trading hours.
• The variety of factors that generate exchange rates.
The volume of foreign exchange traded internationally, with a daily average of US $ 5.1Billions, 4: 5 operating in a single day, which would take Wall Street a month (or more) in the stock market.1
Currency futures contracts were introduced in 1972 on the Chicago Mercantile Exchange and is one of the most actively traded contracts. The volume of currency futures has grown rapidly in recent years, but accounts for only about 7% of the total volume of the foreign currency market, according to the Wall Street Journal Europe (5/5/06, p. 20). The ten most active participants account for almost 73% of volume traded, according to the Wall Street Journal Europe, (2/9/06 P. 20).
The large international banks provide the foreign exchange market with a bid price and a ask price. The spread is the difference between these prices and is usually constituted as the remuneration to the entity for its role of intermediary between those who buy and those who sell using their channels. Usually the spread in the most traded currencies is only 1-3 pips or basic points (which is the minimum amount that can change the price of a currency). For example, if the bid (bid price) on a EUR / USD price is 1.2200 while the Ask (sale price) is set at 1.2203, the 3 pips of Spread can be clearly identified.
Among the implications of not being a centralized market is the one that does not exist a single quote for the currencies that are negotiated: this depends on the different agents that participate in the market.
The foreign exchange market is a global market that, although it has 24 hour access, in practice is limited by the parenthesis of operations at the weekend. Even in these periods of disruption, traders can place buying or selling positions that will be energized when the market begins to fluctuate. It is not less important to take into account that during the trading period, the time of day that is accessed in this market has a direct impact on liquidity to operate in one or several currencies. The moments in which the main markets of the world open are those of greater liquidity and movement, although the Forex market is not directly linked to the nature of these trading centers. Since we are talking about an over-the-counter market, we should not underestimate the changes that these centers can cause.
The main trading centers are the London, New York and Tokyo stock exchanges. First they open the Asian markets, later the European ones and finally they open the American markets. The market opens on Sunday afternoon (Eastern United States time) and closes on Friday at 4:00 p.m. Eastern Time. This allows thePermanent access to markets with the benefit of increased liquidity and a rapid response capability to economic or political developments affecting it.
Fluctuations in exchange rates are generally caused by real money flows as well as by expectations of changes in them due to changes in economic variables such as GDP growth, inflation, interest rates, budget and deficits Or trade surpluses, among others.
Important news is often published on scheduled dates, so investors have access to the same news at the same time. However, large banks have one important advantage: they can view the order book of their customers.
In the currency market, currencies are traded at crosses. Each currency crossing is an individual product and is traditionally annotated as XXX / YYY, where YYY is the international ISO 4217 three-letter code in which the price of one unit of XXX is expressed. For example: EUR / USD is the price of Euro (EUR) expressed in US dollars (USD), meaning that 1 euro = 1.3272 US dollars (August 22, 2014)
According to the BIS study, the most traded currency crosses were: 4: 13
• EUR / USD - 23.0%
• USD / JPY - 17.7%
• GBP / USD - 9.2%