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The evolution of the Foreign Exchange (forex)
markets during the recent years has been
marked by persistently increasing computerized
trading operations. The market has been expanding
rapidly, both in terms of volume and number of
market participants. Although there are many forex
tools that can be used in these markets, spot
currency trading is the most popularly used one.
Forex market, which was once the domain of banks,
large financial institutions and multinationals, is now
a lucrative market for all types of investors
including the individual investors. However, only
the developed countries like the US, Japan and UK
are involved in using currency trading as a tool
for investment. Unlike trading of other instruments, like stocks and derivatives, forex trading is not
carried out in any regulated exchange. Despite this, currency trading has constantly outperformed all the
other markets because of its macroeconomic nature. Though the forex market is the world's largest and
most rewarding financial market, forex trading is quite unfamiliar to many. This article provides a bird's
eye view on forex trading.
The Foreign Exchange Market, popularly referred to as forex market is the largest financial market
in the world. It's trading volumes amount to more than $3.5 tn a day, which is almost thrice the
volume of the combined stocks and futures markets. According to a survey conducted by the Bank
for International Settlements (BIS) in April 2007, the forex market grew at an unprecedented growth
rate of 71% from 2004 to 2007. The forex market instruments include swaps, spot transactions
and forwards. Charts 1 and 2 show the average daily turnover of the forex market, instrument-wise
and counterparty-wise.
Forex spot market is a market where currencies are purchased and sold immediately, with no
time lapse between the trades. The transactions are settled within two business days. Use of technical
rules is very common in forex spot markets. The market is very dynamic and is the world's most
liquid market, measured in terms of daily trade volumes and number of transactions. Online spot
forex market is not limited to any particular geographic location and virtually all professional traders
conduct most of their forex dealings in spot forex market. The usage of spot currency trading can be
well appreciated by the fact that more than one-third of the investment activity in forex market is
done through this method of trading.
The major markets for forex transactions include London, New York and Tokyo. The US and
the UK markets alone account for over 50% of turnover. |
