FX Trading Characteristics

There is no market unified or centrally cleared for the majority of forex market trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where various currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be tortured by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is normally the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called  forex market space exposed in 2007 and aspired but failed to the role of a central market clearing mechanism.

London the main trading market center is, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks all over the world take part. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session launches’, followed by the North American session and then back to the Asian session, excluding weekends.

Fluctuations in exchange rates are usually occurred by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (buying power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade paucity or surpluses, large cross-border M&A deals and other macroeconomic situation. Major news is disclosed publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important benefit; they can see their customers' order flow.

Currencies are traded against one another. Each currency pair thus forms individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217 international three-letter code of the currencies concerned. The first currency (XXX) is the base currency that is quoted relative to the second currency (YYY), termed as the counter currency (or quote currency). For example, the quotation EURUSD (EUR/USD) 1.5465 is the value of the euro expressed in US dollars, meaning 1 euro = 1.5465 dollars. The market convention is to quote most exchange rates against the USD with the US dollar as the base currency The exceptions are the British pound (GBP), Australian dollar (AUD), the New Zealand dollar and the EURO where the USD is the counter currency The factors that affect XXX will affect both XXXYYY and XXXZZZ. This causes positive currency correlation between XXXYYY and XXXZZZ.

On the spot market, according to the 2010 Triennial Survey, the most heavily traded bilateral currency pairs were as follows:

•    EURUSD: 28%
•    USDJPY: 14%
•    GBPUSD (also called cable): 9%

and the US currency was involved in 84.9% of transactions, followed by the euro (39.1%), the yen (19.0%), and pound sterling (12.9%).Volume percentages for all individual currencies should add up to 200%, as each transaction involves two currencies.

Trading in the euro has grown mentionably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has depreciated during 2008, interest in using the euro as reference currency for prices in commodities component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries have also increased.

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