What are Forex Marketplaces?

Forex description of the sector

About Forex Marketplaces

This is the kind of marketplace where you can purchase, sell, exchange and bet on currencies. The FX marketplace consists of financial entities, commercial firms, central banks, investment management companies, hedge funds, retail FX brokerages and investors. The currency marketplace is seen as one of the biggest financial marketplaces with more than 5 trillion dollars in daily transactions, which is more than the combo of futures and equity marketplaces.

Forex Business Foundation

The FX marketplace is not overtaken by one marketplace exchange, but a worldwide web of computers and brokerages from over the globe. FX brokerages are marketplace makers, too, and they could post bid and ask prices for a currency pair that varies from the most competitive bid in the marketplace.

The FX marketplace has a couple of levels – the interbank marketplace and over-the-counter marketplace. That marketplace is the place where big financial institutions trade currencies for reasons like hedging, balance sheet adjustment, and in the name of clients. The OTC marketplace is where individuals trade via web-based platforms and brokerages.

Hours of Service

From Monday morning in Asia to Friday noon in NYC, the FX marketplace is an around-the-clock operation, which means that it does not close over the night. This varies from marketplaces like equities, shares, and commodities, all of which close for a set timeframe, usually in NYC late in the afternoon. As in most items, though, you have exceptions. Some emerging marketplace currencies will close for some time during the trading day.

Major Players

The US dollar is the most exchanged currency, accounting for nearly 85 percent of all transactions. The second is the EUR, which is a portion of 39 percent of total currency transactions, and the third with 19 percent is the Japanese yen. (Note: these figures do not count to a total of 100%, since there are a couple of sides to each forex trade).

According to the 2018 Greenwich Associates report, Citigroup and JPMorgan Chase & Co. were the couple of the largest FX banks, accounting for over 30% of the world’s marketplace share. The remaining positions in the top 5 were UBS, Deutsche Bank, and Goldman Sachs. According to CLS, the settlement and processing company, the median daily trading volume was $1,805 trillion in the first month 2018.

Roots of the FX Marketplace

Before WWI, currencies were tied to gold and silver. But the structure failed and the Bretton Woods Agreement came into place following WWII. The agreement led to the development of 3 global organizations to promote economic activity around the world. They were the IMF, the General Agreement on Tariffs and Trade (GATT) and the International Bank for Reconstruction and Development (IBRD). The novel scheme replaced precious metals with the USD as an foreign currency reference, too. The U.S. government vowed to take care of the supply of equal gold reserves to the currency.

But the Bretton Woods scheme was rendered obsolete in 1971, when President Nixon declared a temporary suspension of USD convertibility into precious metals. Currency is now free to select its own peg and its worth is dictated by supply and demand in foreign marketplaces.

MAIN MOMENTS

  • The FX marketplace is one where investors can purchase, sell, swap and speculate on currencies.
  • It runs worldwide, 5 days a week, and is responsible for nearly $5T of trading turnover.