Foreign Exchange Market

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By Richard Naxon

The foreign exchange market (forex, FX or currency market) is the largest financial market in the world in terms of trading volume.

The Foreign Exchange market is a decentralized or over-the-counter (OTC) market for the trading of currencies.  It is unlike the stock market which is run from a central exchange, like the New York Stock Exchange.

What the foreign exchange market does are these:

  • determining the foreign exchange rates
  • all the aspects of selling and buying and exchanging currencies at specific prices including the current prices.

Most times, when you open up your TV and when there’s business news on financial markets, most of what is talked about is centered mostly around stock/shares.

This gets many people to think that the share market must be the largest financial market in the world.

Well, that was what I used to think too until I started learning about the forex market. It is a bit surprising that the forex market doesn’t get as much attention as the share market.



People have been trading and exchanging currencies in ancient times.

  • Jesus kicked out money changers in the Temple.
  • In the 4th century AD, the Byzantine government kept a monopoly of the exchange of currency
  • Papyri PCZ|59021(c.259/8 BC), also show that exchange of coinage was taking place in Ancient Egypt

Currency exchange in the ancient times enabled people to buy and sell items.

Medieval and later

  • the Medici family would open banks at foreign locations so that they can exchange currencies to act on behalf of textile merchants.
  • During the 17 or 18th century, Amsterdam maintained at active foreign exchange market.
  • In 1704, foreign exchange took place between agents acting in the interest of Kingdom of England and the country of Holland.

Early Modern

  • Alex Brown & Son traded foreign currencies around 1850 and was a leading currency trader in USA.
  • In 1880, J.M. Do Espirito Santo de Silva applied for and was given permission to engage in foreign exchange trading business
  • The year 1880 is a defining year because that is when the modern foreign exchange began: the gold standard was introduced.
  • Prior to World War 1, there was much more limited control of international trade. But countries abandoned the gold standard monetary system due to war.

Modern to post-modern

  • 1899-1913, holdings of foreign exchange increased from at at a rate of 10.8% annualy and gold at a rate of 6.3% between 1903 and 1913
  • At the end of 1913, almost half the world’s foreign exchange was conducted using pound sterling.
  • Number of banks operating in London increased from 3 in 1860 to 71 in 1913
  • Currency trading became more active at the start of the 20th century in Paris, New York and Berlin.

Main Participants Of The Foreign Exchange Market

  • governments and central banks
  • banks and other financial institutions
  • hedgers
  • speculators
  • businesses that deal in import/export
  • individuals like tourists, visitors, that travel for business or pleasure overseas. As soon as they exchange their money for the country the country that they are going to, that is foreign exchange taking place.

Forex Market Size And Liquidity

  • The foreign exchange market is the most liquid market in the world
  • in 2010, a survey was conducted by the Bank of International settlements and it found that the average daily turnover was $3.98 trillion in April 2010 compared to a $1.7 Trillion in 1998.  The survey also found that foreign exchange trading in the United Kingdom account for 36.7% of the total marking it the most important center for foreign exchange in the world. Trading in the United States was 17.9% and Japan 6.2%.
  • In 2013, here’s how the average daily foreign exchange trading volume stood between major financial centers in the globe: UK(41%), USA (19%), Singapore (6%), Hong Kong (4%).