Forex & Its Market
The foreign exchange or forex market is the largest financial market in the world — larger even than the stock market, with a daily volume of $5.1 trillion, vs. $84 billion for equities worldwide, according to the 2016 Triennial Central Bank Survey of Forex and OTC derivatives markets. The digital site where one currency is exchanged for another, the forex market has a lot of unique attributes that may come as a surprise for new traders. In this article we will take an introductory look at forex, and how and why traders are increasingly flocking toward this type of trading.
The foreign exchange (also known as FX or forex) market is a global marketplace for exchanging national currencies against one another.
Market participants use forex to hedge against international currency and interest rate risk, to speculate on geopolitical events, and to diversify portfolios, among several other reasons.
Major players in this market tend to be financial institutions like commercial banks, central banks, money managers, and hedge funds.
Global corporations use forex markets to hedge currency risk from foreign transactions.
Individuals (retail traders) are a very small relative portion of all forex volume and mainly use the market to speculate and day trade.
How Much Money Is Traded on The Forex Market Daily?
Currency can be traded through spot transactions, forwards, swaps, and option contracts where the underlying instrument is a currency. And since currency trading occurs continuously around the world, 24 hours a day, five days a week, it is no surprise that the trading amount is over the odds.
Trading in the global foreign-exchange market has jumped to the highest-ever level at $6.6 trillion, according to the Bank for International Settlements (BIS).
The average daily trading in April was up 29% from $5.1 trillion in the same month in 2016, the BIS reported Monday in a triennial survey on the industry. The growth of Forex derivatives trading, primarily swaps, outpaced the spot market and now accounts for almost half of global Forex turnover.
Daily currency trading volumes rise to $6.6 trillion in April 2019
The three years since the previous BIS survey have been marked by a slide and then strong recovery in the dollar, which remains the world’s preeminent currency. Nearly nine out of every 10 currency trades are against the greenback. As a trading centre, the U.S. has fared less well, losing ground to London, which has shrugged off Brexit uncertainty to account for 43% of all activity.
“The U.S. dollar retained its dominant currency status, being on one side of 88% of all trades,” BIS said. “Currencies of emerging market economies again gained market share, reaching 25% of overall global turnover.”
The share of trading in the U.S. slipped to 17%. Along with Hong Kong, Singapore, Japan, United Kingdom, and the U.S. facilitated more than three-quarters of the total. Mainland China saw a significant rise to become the eighth-largest centre, according to BIS.
The share of trades involving the euro increased to 32%, while the yen slipped to 17% yet held its spot as the third-most actively traded. A factor for the decline in yen trading may have been reduced price swings seen in April, BIS said. A JPMorgan Volatility Index of Group-of-Seven currencies collapsed that month to its lowest since 2014.
The yuan’s slice of the market remained steady at around 4%, just behind the Swiss franc, while the Hong Kong dollar saw its market share climb to 3.5%, from 1.7%.
King Dollar Solidifies Dominance in Global Market Share
Hong Kong dollar doubles its slice
New traders have started to muscle their way into the ranks of the biggest currency dealers, alongside banks. It was rated the fourth biggest in an annual foreign-exchange survey from Euromoney Institutional Investor Plc. JPMorgan Chase & Co. was the largest with a 9.8% market share, with Deutsche Bank AG following at 8.4% and Citigroup Inc. with 7.9%.
While spot currency trading rose 20% to $2 trillion a day, as a share of global Forex activity it fell to 30% in April, from a third in 2016 and 38% in 2013. The use of swaps, which allow an investor to borrow one currency from a counter-party while simultaneously lending a second currency to another, climbed more than a third to $3.2 trillion. The growth may reflect the greater need to hedge given growing global trade worries and political risks.
Trading of outright forwards also increased, with a large part of the rise due to non-deliverable forwards. That reflected strong activity in NDF markets for the Korean won, Indian rupee, and Brazilian real, the BIS said.
“While we’ve seen growth across all forms of Forex trading, swaps and forwards have seen particular growth,” said Matthew Hodgson, CEO and founder of Mosaic Smart Data, which provides data analytics to currency desks at banks. “The Forex market has woken up.”