The Foreign Exchange

For those of us who think of foreign exchange rates when we prepare to go on a cruise or fly across an ocean it may be surprising to find out how important the trade of foreign currencies is to the financial function of trade around the world. The foreign exchange market (or Forex for short) is how international currencies are traded around the globe. The relative values awarded to the currencies of different nations are determined by the foreign exchange market.

The ability to convert currency between countries is essential to international investment and trade. This allows businesses from around the world to pay each other in the proper currency. Traditionally a business will pay in one currency for an equal exchange value of another currency and use that money to pay their supplier.

The vastness of the foreign exchange market is incomparable. There is no other financial institution that covers most of the world. The forex operates 24 hours a day from Sunday evening through Friday evening. The forex has the largest volume of trade with the greatest asset class in the world allowing for high liquidity. The exchange offers very small margins of profit when compared to more traditional markets and exchange rates are constantly being affected by multiple factors in multiple countries.

The foreign exchange market makes nearly four trillion dollars’ worth of daily transactions. This allows the forex to be far more liquid than any other financial market on the planet. Banks, corporations, investors, speculators, and governments all depend on the forex for daily trade and the amount of trade performed each day continues to grow. Without the ability to convert currencies to relevancy between nations international trade would fail completely.

Over the past decade foreign exchange trading has more than doubled. The variables for this incredible increase are multi-faceted. The advent of electronic trading and execution has allowed more business to take place each day at far lower costs than before. With the growth of internet and electronic transactions increasing numbers of diverse clients have been introduced to the forex. New investors and corporations with new access have become important to the amount of trade done daily. High-frequency traders have increased their exchange activities and retail investors have grown into a valuable segment of the market.

The foreign exchange market is very different than stock market exchanges as it is divided into separate levels of access. The largest banks in the world as well as securities dealers fill the top tier. This high level access is very secure. Spread rates between bids and ask prices are only known to those with access. The spread is smaller for larger transactions which nearly always belong to the companies in the top tier. This spread widens as you move through the access levels toward the bottom. Below the largest banks are smaller banks. Multinational corporations, retail marketers, and hedge funds fall below the smaller banks. Even insurance companies, pension funds and other financial investors fill in the bottom tiers of access to the forex.