Fascinating Facts about Forex

Market

Foreign Exchange Market

The Foreign Exchange Market goes by many names—Currency
Exchange, Foreign Exchange, Forex, FX—but no matter the term, it
is simply the trading of one currency against another. Currencies
are traded in the form of currency pairs with pricing based on
exchange rates and spreads established by participants in the forex
market.

History
It is considered an over-the-counter (OTC) market,
meaning that transactions are conducted between two
counter parties that agree to trade via telephone or
electronic network. OTC trades are not centralized in one
location like some equity stock markets such as the New
York Stock Exchange (NYSE) or the Chicago Options Board
Exchange (CBOE) where options and futures are traded.
As FX trading has evolved, several locations have emerged
as market leaders. Currently, London, England contributes
the greatest share of transactions with over 32% of the
total trades. Other trading centers—listed in order of
volume— are New York, Tokyo, Zurich, Frankfurt, Hong
Kong, Paris, and Sydney.
Because these trading centers cover most of the major
time zones, FX trading is a true 24-hour market that
operates five days a week. For example, as a trader in New
York, you have access to the FX market starting Sunday
evening when the market opens in Sydney for the start of
the trading week. Trading centers around the globe then
come online until New York closes at 4:30 PM EST. Of
course, by this time, Sydney will have reopened for the
next trading day so you can continue to trade around the
clock until the New York close on Friday.

Why Do We Need to Exchange Currencies?

 Individuals and organizations exchange currencies
whenever they require foreign goods or services. A trading
market has developed around these needs, and hedging
practices refined.
Historically, the forex trading market centered around
central banks, commercial financial institutions, and
multinational corporations. However, with the advent of
web-based trading applications, small retail traders and
even individuals now participate directly in the forex
market on equal footing with these large institutions.

The following facts and figures relate to the foreign

exchange market is drawn from the 2007 Triennial Central
Bank Survey of Foreign Exchange and Derivatives Market
Activity conducted by the Bank for International Settlements
(BIS) in April 2007. 54 central banks and monetary
authorities participated in the survey, collecting information
from approximately 1280 market participants.

Excerpt from the BIS:

"The 2007 survey shows an unprecedented rise in activity in

traditional foreign exchange markets compared to 2004.
Average daily turnover rose to $3.2 trillion in April 2007, an
increase of 71% at current exchange rates and 65% at
constant exchange rates...Against the background of low
levels of financial market volatility and risk aversion, market
participants point to a significant expansion in the activity of
investor groups including hedge funds, which was partly
facilitated by substantial growth in the use of prime
brokerage, and retail investors...A marked increase in the
levels of technical trading – most notably algorithmic trading
– is also likely to have boosted turnover in the spot
market...Transactions between reporting dealers and non-
reporting financial institutions, such as hedge funds, mutual
funds, pension funds and insurance companies, more than
doubled between April 2004 and April 2007 and contributed
more than half of the increase in aggregate turnover." - BIS
Structure

• Decentralised 'interbank' market

• Main participants: Central Banks, commercial and
investment banks, hedge funds, corporations & private
speculators
• The free-floating currency system began in the early
1970's and was officially ratified in 1978
• Online trading began in the mid to late 1990's

Source: BIS Triennial Survey 2007

Trading Hours

• 24 hour market
• Sunday 5pm EST through Friday 4pm EST.
• Trading begins in New Zealand, followed by Australia,
Asia, the Middle East, Europe, and America

Size

• One of the largest financial markets in the world

• $3.2 trillion average daily turnover, equivalent to:

o More than 10 times the average daily turnover of

global equity markets 1
 o More than 35 times the average daily turnover of
the NYSE2
o Nearly $500 a day for every man, woman, and
child on earth 3
o An annual turnover more than 10 times world
GDP4

• The spot market accounts for just under one-third of

daily turnover

1. About $280 billion - World Federation of Exchanges

aggregate 2006
2. About $87 billion - World Federation of Exchanges 2006
3. Based on world population of 6.6 billion - US Census
Bureau
4. About $48 trillion - World Bank 2006.

Major Markets

• The US & UK markets account for just over 50% of

turnover
• Major markets: London, New York, Tokyo
• Trading activity is heaviest when major markets
overlap5
• Nearly two-thirds of NY activity occurs in the morning
hours while European markets are open

5. The Foreign Exchange Market in the United States - NY

Federal Reserve
6. The Foreign Exchange Market in the United States - NY
Federal Reserve

Average Daily Turnover by Geographic

Location
Concentration in the Banking Industry

• 12 banks account for 75% of turnover in the U.K.

• 10 banks account for 75% of turnover in the U.S.
• 3 banks account for 75% of turnover in Switzerland
• 9 banks account for 75% of turnover in Japan

Source: BIS Triennial Survey 2007

Currencies

• The US dollar is involved in over 80% of all foreign

exchange transactions, equivalent to over US$2.7
trillion per day.

Average Daily Turnover by

Currency Codes Currency
USD = US Dollar
EUR = Euro
JPY = Japanese Yen
GBP = British Pound
CHF = Swiss Franc
CAD = Canadian Dollar
AUD = Australian
Dollar
NZD = New Zealand
Dollar
Currency Pairs

• Majors: EUR/USD, USD/JPY, GBP/USD, USD/CHF

• Dollar bloc: USD/CAD, AUD/USD, NZD/USD
• Major crosses: EUR/JPY, EUR/GBP, EUR/CHF

Average Daily Turnover by Currency Pair

Source: BIS Triennial Survey 2007

Retail Trading

• Anecdotal research from retail brokers suggests 90% of

retail traders lose money, 5% breakeven, and 5%
make money.

Source:

http://www.bis.org/publ/rpfxf07t.htm
http://www.goforex.net/forex-market-snapshot.htm,
http://fxtrade.oanda.com/learn/what_is_forex/currency_exc
hange_market.shtml