Foreign exchange is traded essentially in two distinctive ways. Over an organized exchange and 'over the counter'. Exchange traded foreign exchange represents a very small portion of the total foreign exchange market the great majority of foreign exchange deals being traded between banks and other market participants 'over the counter'.
1. Exchange traded currencies
In the case of an organized exchange like the Chicago Mercantile
exchange (CME) in the
2. Forex market
In comparison, the over the counter market is traded around the
world by a multitude of participants and price quality, reputation and trading
conditions determine who a participant wishes to trade with. It is probably the
most competitive market in the world and brokers must insure they live up to
the highest standards of service and be compliant with market standards and
practices if they want to acquire new customers and retain their existing ones.
In 1998 a survey under the auspices of the Bank for International Settlements
(BIS), global turnover of reporting dealers was estimated at about USD 1.49
trillion per day. In comparison, currency futures turnover was estimated at USD
12 billion. Among the various financial centers around the world, the largest
amount of foreign exchange trading takes place in the
Forex market is by far the largest and most liquid in the world.
There are many advantages to trading spot foreign exchange as opposed to
trading stocks and futures. Below are listed those main advantages.
1. Bid/Ask Spread rates
Spread rates have tightened in the last years. Most online Forex
brokers offer a spread of 4 pips on EURUSD, which is the most widely traded and
liquid currency pair. In stock trading, only liquid stocks offer tight spreads.
In comparison most Forex platforms offer nowadays a 4-pip spread on all major
currencies.
In the futures market spreads can vary anywhere between 4 and 9
pips and can become even larger under illiquid market conditions (which tends
to happen substantially more often in futures currencies).
2. 24 hour market
Foreign exchange market trading occurs over a 24-hour period
picking up in on Sunday and coming to an end in the
3. Leverage
Nowadays, most Forex platforms offer leverage up to even 100:1,
which allows any Forex trader to trade much more amount than he actually has in
his/her account.
Originally our ancestors conducted trading of goods against
other goods this system of bartering was of course quite inefficient and
required lengthy negotiation and searching to be able to strike a deal.
Eventually forms of metal like bronze, silver and gold came to be used in
standardized sizes and later grades (purity) to facilitate the exchange of
merchandise. The basis for these mediums of exchange was acceptance by the
general public and practical variables like durability and storage. Eventually
during the late middle ages, a variety of paper IOU started gaining popularity
as an exchange medium.
The obvious advantage of carrying around 'precious' paper versus
carrying around bags of precious metal was slowly recognized through the ages.
Eventually stable governments adopted paper currency and backed the value of
the paper with gold reserves. This came to be known as the gold standard. The
Bretton Woods accord in July 1944 fixed the dollar to 35 USD per ounce and
other currencies to the dollar. In 1971, president Nixon suspended the
convertibility to gold and let the US dollar 'float' against other currencies.
Since then the foreign exchange market has developed into the largest market in
the world with a total daily turnover of about 1.5 trillion USD. Traditionally
an institutional (inter-bank) market, the popularity of online currency trading
offered to the private individual is democratizing foreign exchange and
widening the retail market.
Foreign exchange is an 'over the counter' (OTC) market, that
means that there is no central exchange and clearing house where orders are
matched. Geographic trading 'centers' exist around the world however and are:
(in order of importance)
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