Forex business Introduction The following facts and figures relate to the foreign exchange market. Much of the information is drawn from the 2010 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2010. 53 central banks and monetary authorities participated in the survey, collecting information from 1,309 market participants. Excerpt from the BIS: "The 2010 triennial survey shows another significant increase in global foreign exchange market activity since the last survey in 2007, following the unprecedented rise in activity between 2004 and 2007. Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007. This increase brought average daily turnover to $4.0 trillion (from $3.3 trillion) at current exchange rates...The higher global foreign exchange market turnover in 2010 is largely due to the increased trading activity of â€œother financial institutionsâ€• â€“ a category that includes nonreporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others. Turnover by this category grew by 42%, increasing to $1.9 trillion in April 2010 from $1.3 trillion in April 2007." - BIS Structure Decentralised 'interbank' market Main participants: Central Banks, commercial and investment banks, hedge funds, corporations & private speculators The free-floating currency system arose from the collapse of the Bretton Woods agreement in 1971 Online trading began in the mid to late 1990's Source: BIS Triennial Survey 2010 Trading Hours 24 hour market Sunday 5pm EST through Friday 4pm EST. Trading begins in the Asia-Pacific region followed by the Middle East, Europe, and America Size One of the largest financial markets in the world $4.0 trillion average daily turnover, equivalent to: o More than 12 times the average daily turnover of global equity markets 1 o More than 50 times the average daily turnover of the NYSE2 o More than $500 a day for every man, woman, and child on earth 3 o An annual turnover more than 10 times world GDP4 The spot market accounts for over one-third of daily turnover 1. About $320 billion - World Federation of Exchanges aggregate 2009 2. About $70 billion - World Federation of Exchanges 2009 3. Based on world population of 6.9 billion - US Census Bureau 4. About $58 trillion - World Bank 2009. Source: BIS Triennial Survey 2010 Major Markets The US & UK markets account for over 50% of daily turnover Major markets: London, New York, Tokyo Trading activity is heaviest when major markets overlap5 Nearly two-thirds of NY activity occurs in the morning hours while European markets are open 6 5. The Foreign Exchange Market in the United States - NY Federal Reserve 6. The Foreign Exchange Market in the United States - NY Federal Reserve Average Daily Turnover by Geographic Location Source: BIS Triennial Survey 2010 Concentration in the Banking Industry 9 banks account for 75% of turnover in the U.K. 7 banks account for 75% of turnover in the U.S. 2 banks account for 75% of turnover in Switzerland 8 banks account for 75% of turnover in Japan Source: BIS Triennial Survey 2010 Technical Analysis Commonly used technical indicators: Moving averages RSI Fibonacci retracements Stochastics MACD Momentum Bollinger bands Pivot point Elliott Wave Currencies The US dollar is involved in over 80% of all foreign exchange transactions, equivalent to over US$3.3 trillion per day Currency Codes USD = US Dollar EUR = Euro JPY = Japanese Yen GBP = British Pound CHF = Swiss Franc CAD = Canadian Dollar (Sometimes referred to as the "Loonie") AUD = Australian Dollar NZD = New Zealand Dollar Average Daily Turnover by Currency N.B. Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%. Source: BIS Triennial Survey 2010 Currency Pairs Majors: EUR/USD (Euro-Dollar), USD/JPY, GBP/USD - (commonly referred to as the "Cable"), USD/CHF Commodity currencies: USD/CAD, AUD/USD, NZD/USD - (commonly referred to as the "Kiwi") Major crosses: EUR/JPY, EUR/GBP, EUR/CHF Average Daily Turnover by Currency Pair Foreign Exchange Market From Wikipedia The foreign exchange (currency or forex or FX) market exists wherever 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 (small speculators) are a small part of this market. They may only participate indirectly through brokers or banks and may be targets of forex scams. Contents Market size and liquidity Trading characteristics Market participants o Banks o Commercial Companies o Central Banks o Investment Management Firms o Hedge Funds o Retail Forex Brokers Speculation Reference See also External links 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 o $200 billion in outright forwards o $1,000 billion in forex swaps o $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). % of overall volume, May 2005 Top 10 Currency Traders Name % of volume Rank 1 Deutsche Bank 17.0 2 UBS 12.5 3 Citigroup 7.5 The ten most active traders account for almost 73% 4 HSBC 6.4 of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large 5 Barclays 5.9 international banks continually provide the market 6 Merrill Lynch 5.7 with both bid (buy) and ask (sell) prices. The bid/ask 7 J.P. Morgan Chase 5.3 spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and 8 Goldman Sachs 4.4 the price at which a market-maker will buy ("bid") 9 ABN AMRO 4.2 from a wholesale customer. This spread is minimal 10 Morgan Stanley 3.9 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 might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' cheques. Spot prices at market makers vary, but on EUR/USD are usually no more than 5 pips wide (i.e. 0.0005). Competition has greatly increased with pip spreads shrinking on the majors to as little as 1 to 1.5 pips. 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 The main trading centers are in London, New York, and Rank Currency ISO 4217 Code Symbol Tokyo, but banks throughout the world participate. As the Asian trading session ends, the European session begins, 1 United States dollar USD $ then the US session, and then the Asian begin in their 2 Eurozone euro EUR € turns. Traders can react to news when it breaks, rather 3 Japanese yen JPY ¥ than waiting for the market to open. 4 British pound sterling GBP £ There is little or no 'inside information' in the foreign 5-6 Swiss franc CHF - exchange markets. Exchange rate fluctuations are usually 5-6 Australian dollar AUD $ 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. However, the large banks have an important advantage; they can see their customers order flow. Trading legend Richard Dennis has accused central bankers of leaking information to hedge funds.  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. 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. 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 has moved on to more efficient electronic systems, such as EBS, Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago. 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. 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. Investment Management Firms Investment Management firms (who typically manage large accounts on behalf of customers such as pension funds, endowments etc.) use 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 purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximisation. Some investment management firms also have more speculative specialist currency overlay units, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. The number of this type of specialist is quite small, their large assets under management (AUM) can lead to large trades. 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. Retail Forex Brokers Retail forex brokers or market makers 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, 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." All firms offering foreign exchange trading online are either market makers or facilitate the placing of trades with market makers. In the retail forex industry market makers often have two separate trading desks- one that actually trades foreign exchange (which determines the firm's own net position in the market, serving as both a proprietary trading desk and a means of offsetting client trades on the interbank market) and one used for off-exchange trading with retail customers (called the "dealing desk" or "trading desk"). Many retail FX market makers claim to "offset" clients' trades on the interbank market (that is, with other larger market makers), e.g. after buying from the client, they sell to a bank. Nevertheless, the large majority of retail currency speculators are novices and who lose money , so that the market makers would be giving up large profits by offsetting. Offsetting does occur, but only when the market maker judges its clients' net position as being very risky. The dealing desk operates much like the currency exchange counter at a bank. Interbank exchange rates, which are displayed at the dealing desk, are adjusted to incorporate spreads (so that the market maker will make a profit) before they are displayed to retail customers. Prices shown by the market maker do not neccesarily reflect interbank market rates. Arbitrage opportunities may exist, but retail market makers are efficient at removing arbitrageurs from their systems or limiting their trades. A limited number of retail forex brokers offer consumers direct access to the interbank forex market. But most do not because of the limited number of clearing banks willing to process small orders. More importantly, the dealing desk model can be far more profitable, as a large portion of retail traders' losses are directly turned into market maker profits. While the income of a marketmaker that offsets trades or a broker that facilitates transactions 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 they can skew at any time to maximize profits. The rules of the game in trading FX are highly disadvantageous for retail speculators. Most retail speculators in FX lack trading experience and and capital (account minimums at some firms are as low as 250-500 USD). Large minimum position sizes, which on most retail platforms ranges from $10,000 to $100,000, force small traders to take imprudently large positions using extremely high leverage. Professional forex traders rarely use more than 10:1 leverage, yet many retail Forex firms default client accounts to 100:1 or even 200:1, without disclosing that this is highly unusual for currency traders. This drastically increases the risk of a margin call (which, if the speculator's trade is not offset, is pure profit for the market maker). 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.' "  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 . 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 . 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 interferes 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 . 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. Reference Gregory J. Millman, Around the World on a Trillion Dollars a Day, Bantam Press, New York, 1995.