Friday, February 20, 2009

Foreign exchange market

The foreign exchange (currency or forex or FX) market exists wherever one is traded for another. It is by far the largest financial market in the world, and includes trading between large banks,and institutions. The average daily trade in the global forex markets currently around 1.9 trillionRetail traders (individuals) are a small fraction of this market and may only participate indirectly through or banks.

Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access.
At the top is the inter-bank market, which is made up of the largest investment banking firms.
Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle.
As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips only for major currencies like the euro).
This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread.
The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading).