Currency
Trading Market Participants
The foreign
exchange market used to be one where only banks would execute transactions
between themselves. In the last few years, other financial institutions,
like currency brokers and market makers, have hit the currency trading
scene, as well as regular corporations, investment firms, hedge
funds and pension funds. Recently,
individual investors have started to actively participate in the
foreign exchange market, and online currency trading and day trading
has become more and more popular.
The foreign
currency trading market is an "over-the-counter" (OTC)
market. This means that there is no central exchange or clearing
house where currencies are traded and orders are matched [this is
similar to NASDAQ for stocks, although NASDAQ is restricted to the
United States]. Instead, currency exchange transactions take place
in trading centers that exist around the world. In order of importance,
these currency trading centers are: London, New York, Tokyo, Singapore,
Frankfurt, Geneva and Zurich, Paris, and Hong Kong. When banks enter
into a foreign exchange deal, they do so only on the basis of trust
and reputation to deliver on the currency agreement. In the retail
market, currency traders enter into a legal contract with their
brokerage firms in order to deposit funds to trade currencies.
Foreign exchange
market participants might be involved in the purchase or sale of
merchandise internationally, in the investment of foreign plant
and equipment, in the international money market (the trading of
short-term debt securities), or in the direct trading or speculating
in individual currencies. Whether investing, hedging, or speculating,
foreign currency exchange participants might be focused on a trading
time period from a few minutes to a number of years. The currency
exchange rate at any give time is affected by the aggregate activity
of all these participants, since they represent the supply and demand
for the currency involved. The daily trading volume in the major
currencies is so huge that it is extremely difficult for any market
participant to significantly affect the price of any individual
currency.
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