User:Forex

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Foreign Exchange

Exchange Rates Currency band Exchange rate Exchange rate regime Fixed exchange rate Floating exchange rate Linked exchange rate
Markets Foreign exchange market Futures exchange
Products Currency Currency future Forex swap Currency swap Foreign exchange option
See also Bureau de Change

Forex is my user name for a reason! I like what has been said here on Wiki about FX, but I don't like the changes that keep being pushed towards "big business" by so called gurus just because they have been around for years. If the major market players want to Spam Wikipedia with their agendas then I will take the bias start for content and edit it the way I see it- as someone in Forex everyday and working with Forex Traders and Brokers everyday. Good retail trading in Forex can bring good insight, and with Programs out there empowering traders many are getting in most cases better then "them" anyway and trading to win is the goal right? Worst case is that retail forex trading has made Forex a "topic" and has driven what was once thought of as the "step child" market into the next big market. So if retail forex has driven the popularity in the first place, retail traders should be heard. So my goal is not let the "Monday morning QB's" fom big banks and brokrage firms and hedge funds come back around and act as if, and push their power agendas. I'm user name FOREX and this part of the Wiki Pedia Forex section should reflect real helpful information! Forex

Forex where one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. Retail traders (speculators) are a smaller part of this market. They may participate directly through brokers or banks if they research the market correctly and or establish relationship with them Many that are not in the know about how the market works have become targets of forex scams.

1 Market size and liquidity
2 Trading characteristics
3 Market participants
4 Speculation
5 Reference
6 See also
7 External links

[edit] Market size and liquidity

The foreign exchange market is unique because of:

its trading volume,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours - 24 hours a day (except on weekends).
the variety of factors that affect exchange rates,

Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study Triennial Central Bank Survey 2004

$600 billion spot
$1,300 billion in derivatives, ie
- $200 billion in outright forwards
- $1,000 billion in forex swaps
- $100 billion in FX options.

Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).

**Top 10 Currency Traders**
Rank	Name	% of volume
1	Deutsche Bank	17.0
2	UBS	12.5
3	Citigroup	7.5
4	HSBC	6.4
5	Barclays	5.9
6	Merrill Lynch	5.7
7	J.P. Morgan Chase	5.3
8	Goldman Sachs	4.4
9	ABN Amro	4.2
10	Morgan Stanley	3.9

The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 1-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $1,000,000.

These spreads do not apply to retail customers. To individuals, banks will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travellers' cheques.

[edit] Trading characteristics

There is no single unified foreign exchange market. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is no such thing as a single dollar rate - but rather a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs.

**Top 6 Most Traded Currencies**
Rank	Currency	ISO 4217 Code	Symbol
1	United States dollar	USD	$
2	Eurozone euro	EUR	€
3	Japanese yen	JPY	¥
4	British pound sterling	GBP	£
5-6	Swiss franc	CHF	-
5-6	Australian dollar	AUD	$

The main trading centers are in London, New York, and Tokyo, but banks throughout the world participate. As the Asian trading session ends, the European session begins, then the US session, and then the Asian begin in their turns. Traders can react to news when it breaks, rather than waiting for the market to open.

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, 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.

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 currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

On the spot market, according to the BIS study, the most heavily traded products were:

EUR/USD - 28 %
USD/JPY - 17 %
GBP/USD (also called cable) - 14 %

and the US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%). (Note that volume percentages should add up to 200% - 100% for all the sellers, and 100% for all the buyers). Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange market is thus still largely dollar-centered. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market.

[edit] Market participants

According to the BIS study Triennial Central Bank Survey 2004

53% of transactions were strictly interdealer (ie interbank);
33% involved a dealer (ie a bank) and a fund manager or some other non-bank financial institution;
and only 14% were between a dealer and a non-financial company.

[edit] Banks

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.

Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business is moving on to more efficient electronic systems, such as Bloomberg EBS and TradeBook(R), Reuters 3000 Matching (D2), and EBS. The broker squawk box lets traders listen in on ongoing interbank trading is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

[edit] Commercial Companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

[edit] Central Banks

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves, to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high - that is, to trade for a profit. Nevertheless, central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in South East Asia.

[edit] Investment Management Firms

Investment Management firms (who typically manage large accounts on behalf of customers such as pension funds, endowments etc.) utilise the Foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the 'spot' market in order to pay for, and redeem, purchases and sales of foreign equities. Since these transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximisation.

Some investment management firms also possess specialist Currency Overlay units, which have the specific objective of managing clients' currency exposures with the aim of generating profits whilst limiting risk. Whilst the number of dedicated currency managers is quite small, the size of their assets under management (AUM) can be quite significant, which can lead to large trades.

[edit] Hedge Funds

Hedge funds, such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

[edit] Retail Forex Brokers

Retail forex brokers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25-50 billion daily, [1]which is about 2% of the whole market. CNN also quotes an official of the National Futures Association "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically."

In the retail Forex industry brokers more often than not run two separate trading platforms - one that they use to actually trade the Forex (non-dealing desk aka non-trading desk) and one that is set up for the expressed purpose of off-exchange trading with retail customers (the dealing desk aka trading desk).

The dealing desk operates much like the currency exchange counter at a bank. Interbank exchange rates, those coming in from the interbank system and displayed at the non-dealing desk, are adjusted to incorporate fixed spreads that guarantee the bank’s (in this instance the broker’s) profit before they displayed in the lobby (at the dealing desk) to the retail customer. Dealing desk pricing is, therefore, not a direct reflection of the currency exchange but an artificial market created and controlled by the originating broker.

While there are only a limited number of retail Forex brokers offering consumers direct access to the Forex through a non-dealing desk, the vast majority do not and for two apparent reasons. First, the number of clearing banks willing to process the orders of private investors is extremely limited so most brokers couldn’t offer traders access to their non-dealing desks if they wanted to. Second, dealing desk brokerage is decidedly more profitable.

Whereas a retail non-dealing desk broker’s income is limited to transaction fees (commissions), dealing desk brokers can generate income in a variety of ways because they not only control the trading process, they also control pricing which can be skewed at any time to maximize profits and to take advantage of internal and external trading opportunities. As evidence of this, traders point to the “reorder”, a broker counteroffer that is issued in response to a trader’s execution order. Instead of the filling an order based on displayed terms, the broker rejects the order, issuing one that detractors believe favors the broker’s interests.

Dealing desk brokers are market makers. They not only create and manage artificial, off exchange trading environments (markets), they also function as market makers for the interbank system and, thereby, serve as independent and competing sources of liquidity for participating banks. This dual capacity is seen by many as posing an inherent conflict of interest because there is nothing to prevent brokers from taking out (spiking or stop phishing) [2] off-exchange trades when the they find an opportunity to fill larger, on-exchange orders.

Like the rebellion that started over a quarter of a century ago that led most small investors to abandon large stock brokerage firms in favor of discount, on-line brokerage firms like Schwab, E-trade, Ameritrade, Datek, and Fidelity, there are those who think retail Forex trading will go much the same way. Investors abandoned large stock brokerage firms not only because the trading costs were lower but because their stockbrokers were more interested in making markets for themselves (churning accounts) and their corporate partners rather than serving the financial needs of the individual trader. Similarly, dealing desk brokers may inevitably be forced to abandon their artificial trading platforms, offering traders direct market access through their non-dealing desks.

According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) "Even people running the trading shops warn clients against trying to time the market. 'If 15% of day traders are profitable,' says Drew Niv, chief executive of FXCM, 'I'd be surprised.' " [3]

In the US, "it is unlawful to offer foreign currency futures and option contracts to retail customers unless the offeror is a regulated financial entity" according to the Commodity Futures Trading Commission [4]. Legitimate retail brokers serving traders in the U.S. are most often registered with the CFTC as "futures commission merchants" (FCMs) and are members of the National Futures Association (NFA). Potential clients can check the broker's FCM status at the NFA. Retail forex brokers are much less regulated than stock brokers and there is no protection similar to that from the Securities Investor Protection Corporation. The CFTC has noted an increase in forex scams [5].

[edit] Speculation

Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, many economists (e.g. Milton Friedman) argue that speculators perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists (e.g. Joseph Stiglitz) however, may consider this argument to be based more on politics and a free market philosophy than on economics.

Large hedge funds and other well capitalized "position traders" are the main professional speculators.

Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not, according to this view. It is simply gambling, that often interfers with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 150% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view [6]. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.

Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.

In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators only made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.