Market size and liquidity
The Forex has several features making it a unique one. For instance, the volume of trades and market liquidity, a great number of the market participants and traders from all over the world, 24 trading hours a day, a great number of factors that can contribute to the exchange rate setting, low net margins (but not the profits) in comparison with other markets.
Therefore it is almost the real market of perfect competition even considering the fact of possible affect by the Central banks. In average daily trades amount at the forex market reaches the point of $3.21 trillion and consists of:
- $1,005 billion related to spot transactions
- $362 billion for outright forwards
- $1,714 billion related to forex swaps
- $129 billion estimated gaps in reporting
Moreover about $2.1 trillion is traded in derivative securities.
Forex futures appeared in 1972 at the Chicago Mercantile Exchange, since then they are traded more actively then the other futures. The amount of the part taken by the futures at the forex market estimated in 7% of the total Forex market volume.
The daily turnover of the traditional Forex transactions in the whole world reached the point of $2.7 trillion (as for the April 2006). It is estimated after the analysis of the data provided by the semi-annual London, New York, Tokyo and Singapore Forex Committee data. In case we will include the volume of the non-traditional forex derivative securities and products that are traded on exchanges the total number will grow to $2.9 trillion daily. This exceeds the all equity markets turnover in 10 times. The volume of the Forex trades grew by 38% in the period of time between April 2005 and April 2006. One of the main reasons is that the Forex become more influential as an asset class and the fund management assets (like hedge and pension funds) increased. Another reason that contributed to the Forex popularity growth is the great range of execution venues (like online trading platforms, etc).
There is not any central exchange at the forex as the market participants deals directly with each other. However the largest forex trading center is in London. According to IFSL data the share of London in the traditional transactions turnover for the whole world is 32.4% (April 2006).
There are 10 big international banks that possess about 73% of all trading volume. They are the source of the bid and ask prices for the market. The bid/ask spread term means the difference between the seller and buyer prices. Those currency pairs traded most actively has quite low bid/ask spread (commonly at the point of 0-3 pips). Let’s consider the following case: the possible bid/ask quote of EUR/USD is 1.2200/1.2203 on a retail broker. The common lot or the minimal amount of the currency units is 100,000.
However the situation for banks clients differs a bit. The bid/ask spread is usually increased to 1.2100/1.2300 (transfers) and 1.2000/1.2400 (banknotes) for them. The prices can differ but as we have already said the most actively traded currency pairs’ spread like EUR/USD one is estimated at 3 pips. Sometimes the spread can be at the point of 1-2 pips for main currencies because of the competition for big deals.
