What is the Forex Market

The forex market is the market in which participants can buy, sell, exchange, and
speculate on currencies. The forex market is made up of banks, commercial
companies, central banks, investment management firms, hedge funds, and retail
forex brokers and investors. The currency market is considered to be the largest
financial market with over $5 trillion in daily transactions, which is more than
the futures and equity markets combined.

Forex Market Basics

Basics of Forex Market
The foreign exchange market is not dominated by a single market exchange, but a
global network of computers and brokers from around the world. Forex brokers act as
market makers as well, and may post bid and ask prices for a currency pair that
differs from the most competitive bid in the market.

The forex market is made up of two levels; the interbank market and the over-the-
counter (OTC) market. The interbank market is where large banks trade currencies
for purposes such as hedging, balance sheet adjustments, and on behalf of clients.
The OTC market is where individuals trade through online platforms and brokers.

Operating hours
From Monday morning in Asia to Friday afternoon in New York, the forex market is a
24-hour market, meaning it does not close overnight. This differs from markets such
as equities, bonds, and commodities, which all close for a period of time,
generally in the New York late afternoon. However, as with most things there are
exceptions. Some emerging market currencies closing for a period of time during the
trading day.

The Big Players

The US dollar is by far the most traded currency, making up close to 85 percent of
all trades. Second is the euro, which is part of 39 percent of all currency trades,
and third is the Japanese yen at 19 percent. (Note: these figures do not total 100
percent because there are two sides to every FX transaction).

According to the 2018 Greenwich Associates study, Citigroup and JPMorgan Chase &
Co. were the two biggest banks in the forex market, combining for more than 30
percent of the global market share. UBS, Deutsche Bank, and Goldman Sachs made up
the remaining places in the top five. According to CLS, a settlement and processing
group, the average daily trading volume in January 2018 was $1.805 trillion.

Origins of Forex Market

Up until World War I, currencies were pegged to precious metals, such as gold and
silver. But the system collapsed and was replaced by the Bretton Woods agreement
after the second world war. That agreement resulted in the creation of three
international organizations to facilitate economic activity across the globe. They
were the International Monetary Fund (IMF), General Agreement on Tariffs and Trade
(GATT), and the International Bank for Reconstruction and Development (IBRD). The
new system also replaced gold with the US dollar as peg for international
currencies. The US government promised to back up dollar supplies with equivalent
gold reserves.