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Foreign
exchange is traded essentially in two distinctive ways. Over an organized
exchange and 'over the counter'. Exchange traded foreign exchange represents
a very small portion of the total foreign exchange market the great majority
of foreign exchange deals being traded between banks and other market
participants 'over the counter'.
1. Exchange traded
currencies
In the case of an
organized exchange like the Chicago Mercantile exchange (CME) in the US,
standardized currency contract sizes that represent a certain monetary
value are traded in the International money market (IMM). A central clearing
house organizes matching of transactions between counter-parties.
2. Forex market
In comparison the
over the counter market is traded around the world by a multitude of participants
and price quality, reputation and trading conditions determine who a participant
wishes to trade with. It is probably the most competitive market in the
world and brokers must insure they live up to the highest standards of
service and be compliant with market standards and practices if they want
to acquire new customers and retain their existing ones. In 1998 a survey
under the auspices of the Bank for International Settlements (BIS), global
turnover of reporting dealers was estimated at about USD 1.49 trillion
per day. In comparison, currency futures turnover was estimated at USD
12 billion.
Among the various
financial centers around the world, the largest amount of foreign exchange
trading takes place in the United Kingdom, even though that nation's currency,
the British pound is less widely traded in the market than several others.
The United Kingdom accounts for about 32 percent of the global total;
the United States ranks a distant second with about 18 percent, and Japan
is third with 8 percent.
Recommended further reading:
Advantages
Origins
Who participate in Forex Trading?
Market Dynamics
Speculation/Investing
Margin Trading
Trading with a Strategy
Risks inherent to Forex
Forex abbreviations
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