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The Forex Market

The foreign exchange market, short Forex market, is the largest and most liquid financial market in the world. According to the 2010 report of the Bank of International Settlement (BIS) – the most important authority in the industry – global daily turnover reached $4 trillion in April 2010. This is a 20 per cent increase over 2007, when the previous report showed an average daily turnover of $3.3 trillion. As the BIS conducts its survey only every three years, later authoritative figures are not available. However, a BIS analyst estimates global daily turnover to have gone up to $4.7 trillion by October 2011. The persistent growth in times of the global financial crisis demonstrates how robust the Forex market is.

There is no unified market for foreign exchange trading. Instead, there are many market makers executing trades in different marketplaces. The biggest players in the market, usually large banks, set the benchmark prices for currencies. The magazine Euromoney lists Deutsche Bank, Citigroup, Barclays, UBS, HSBC and JPMorgan as the banks with the largest share in the global foreign exchange market in its 2012 survey; as does Greenwich Associates, a US based consultancy firm, in its Forex leaders ranking, although in differing order.

The most important Forex market place is the United Kingdom, where 37 per cent of all currency trades took place in 2010. Second strongest market are the United States which accounted for 18 per cent of worldwide foreign exchange market turnover, followed by Japan (6 per cent), Singapore (5 per cent), Switzerland (5 per cent), Hong Kong SAR (5 per cent) and Australia (4 per cent). The most traded currency pair is by far USD/EUR, accounting for almost one third (28 per cent) of the overall daily foreign exchange turnover, followed by USD/JPY (14 per cent) and USD/GBP (9 per cent).

The growth in Forex market volume – to $4 trillion in 2010 and nearly $5 trillion in 2011 – is in part attributed to an increasing number of retail investors participating in currency trading, according to the BIS Quarterly Review from December 2010. Long trading hours, high liquidity, and the availability of leverages are reasons that attract private traders to the foreign exchange market. Individual and small institutional investors in 2010 were estimated to account for a daily turnover of up to $150 billion in spot Forex trading alone. Forex Magnates, a Forex news and research company, puts the retail currency trade volume at $217 billion daily at the end of 2011.

Private investors usually trade via so called "retail aggregators" – online foreign exchange brokers like the Admiral Markets Group that facilitate trades by retail customers. According to a 2010 report by Greenwich Associates retail aggregators accounted for 12 per cent of global foreign exchange turnover in 2009. Their share fell in 2010, but picked up again in 2011, as Greenwich Associates stated in its latest report.

The rise of retail traders as significant participants in the Forex market therefore is mostly due to the expansion of electronic execution methods. Electronic trading and brokering, according to the BIS article, reduce transaction cost and increase market liquidity – which in turn attract retail customers as even small trades can now be accommodated. Greenwich Associates estimated in an April 2012 report more than 60 per cent of all currency trading to be executed electronically today.

 

 
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