Forex market is the largest financial market in the world. It refers to the trading of one foreign exchange or currency for the other. Thus a forex market exists whenever a currency is traded for another currency.
The major players in forex trade are central banks, other large banks, financial institutions, forex speculators, multinational corporations, governments and individuals, also called retail traders.
The volume of forex trading has grown phenomenally from $600 billion in 1998 to close to $3 million a day now. Major players make up the bulk of this trade. Individuals make a small portion of about $50 billion. This in itself is not that small. They operate indirectly through forex brokers and banks, using their forex trading platform.
A forex market is unique because of huge trading volume, extreme liquidity, variance of participants, extensive geographical coverage, long trading hours, simplicity, macro economic factors etc.
Forex trading started in 1970’s after gold deregulation and free exchange rates and floating currencies. The volume grew slowly till the end of 1990’s. After that it grew markedly. In fact the increase in volume was as much as 38% during April 2005 to April 206 alone. This indicates unmatched growth of forex currency trading in such a brief period of time.
The above underscores the growing importance of foreign exchange as a component of overall assets and as a fund management asset. Hedge and pension funds are increasingly using foreign currency exchange for maintaining and balancing their portfolios.
Unlike the stock or commodity markets, there is no central exchange and clearing house. All trades are directly settled over the counter. London is believed to be the biggest trading center with more than 32 percent of forex trading volume.
There is some variation in the prices of currencies at different access levels. Banks and financial institutions which trade in huge amounts of money have small bid / ask spreads as compared to lower level players like individuals.
It is believed that the growth of online forex trading will continue unabated. More and more retail traders are going to participate in foreign exchange trading. Main reason being the simplicity and ease of trading and globalization.
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