There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the
over-the-counter (
OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies
instruments are traded. This implies that there is not a
single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by
arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the
Chicago Mercantile Exchange and
Reuters, called
FxMarketSpace opened in 2007 and aspires to the role of a central market
clearing mechanism.
The main trading center is
London, but
New York,
Tokyo,
Hong Kong and
Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
There is little or no '
inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in
GDP growth, inflation, interest rates, budget and
trade deficits or surpluses, large cross-border
M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers'
order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the
ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called
base currency). For instance, EUR/USD is the price of the
euro expressed in
US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency
correlation between XXX/YYY and XXX/ZZZ.
On the
spot market, according to the BIS study, the most heavily traded products were:
- EUR/USD: 27 %
- USD/JPY: 13 %
- GBP/USD (also called sterling or cable): 12 %
and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), and sterling (15.0%) (see
table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.
Trading in the euro has grown considerably since the currency's creation in January
1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during
2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased
