Market Size & Liquidity

Market Size and liquidity

The foreign exchange market is the most liquid financial market in the world. Traders include large banks, 

central banks, institutional investors, currency speculators, corporations, governments, other financial

institutions, and retail investors. The average daily turnover in the global foreign exchange and

 related markets is continuously growing. According to the 2010 Triennial Central Bank Survey,

coordinated by the Bank for International Settlements, average daily turnover wasUS$3.98 trillion in

 April 2010 (vs $1.7 trillion in 1998).^[3] Of this $3.98 trillion, $1.5 trillion was spot foreign

 exchange transactions and $2.5 trillion was traded in outright forwards, FX swaps and other currency

 derivatives.

Trading in the UK accounted for 36.7% of the total, making UK by far the most important global

center for foreign exchange trading. In second and third places, respectively, trading in the

 USA accounted for 17.9%, and Japan accounted for 6.2%.^[5]

The $3.98 trillion break-down is as follows:

• $1.490 trillion in spot transactions
• $475 billion in outright forwards
• $1.765 trillion in foreign exchange swaps
• $43 billion currency swaps
• $207 billion in options and other products

Contents  [hide] 1 Market Size and liquidity 2 Market participants 2.1 Banks 2.2 Commercial companies 2.3 Central banks 2.4 Forex Fixing 2.5 Hedge funds as speculators 2.6 Investment management firms 2.7 Retail foreign exchange traders 2.8 Non-bank foreign exchange companies 2.9 Money transfer/remittance companies and bureau de changes 3 Trading characteristics 4 Determinants of FX rates 4.1 Economic factors 4.2 Political conditions 4.3 Market psychology 5 Financial instruments 5.1 Spot 5.2 Forward 5.3 Swap 5.4 Future 5.5 Option 6 Speculation 7 Risk aversion in forex 8 See also 9 Notes 10 References 11 External links

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter(OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and aspired but failed to the role of a central market clearing mechanism.^{[citation needed]}

The main trading center is London, but New York, Tokyo, Hong Kong andSingapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.

Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.

See also

Balance of trade Bretton Woods system Currency codes Currency pair Currency strength Foreign currency mortgage

Foreign exchange controls Foreign exchange hedge Foreign exchange reserves Foreign exchange scam Foreign exchange swap Foreign exchange autotrading

Money market Nonfarm payrolls Special Drawing Rights Tobin Tax World currency