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Basic Concepts II: Nature of the Foreign Exchange Market
The Foreign Exchange Market is an over-the-counter (OTC) market, which means that there is no central exchange and clearing house where orders are matched. With different levels of access, currencies are traded in different market makers:
The Inter-bank Market - Large commercial banks trade with each other through the Electronic Brokerage System (EBS). Banks will make their quotes available in this market only to those banks with which they trade. This market is not directly accessible to retail traders.
The Online Market Maker - Retail traders can access the FX market through online market makers that trade primarily out of the US and the UK. These market makers typically have a relationship with several banks on EBS; the larger the trading volume of the market maker, the more relationships it likely has.
Forex is a market that trades actively as long as there are banks open in one of the major financial centers of the world. This is effectively from the beginning of Monday morning in Tokyo until the afternoon of Friday in New York. In terms of GMT, the trading week occurs from Sunday night until Friday night, or roughly 5 days, 24 hours per day.
Price Reporting Trading Volume
Unlike many other markets, there is no consolidated tape in Forex, and trading prices and volume are not reported. It is, indeed, possible for trades to occur simultaneously at different prices between different parties in the market. Good pricing through a market maker depends on that market maker being closely tied to the larger market. Pricing is usually relatively close between market makers, however, and the main difference between Forex and other markets is that there is no data on the volume that has been traded in any given time frame or at any given price. Open interest and even volume on currency futures can be used as a proxy, but they are by no means perfect.
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The Foreign Exchange (Forex or FX) market is a huge network where people trade currencies all over the world. It's essential for international trade and offers some pretty interesting opportunities for traders.
What's Different About the Forex Market?
Well, for starters, it's an over-the-counter (OTC) market. This means there's no central place like a stock exchange where trades happen. Instead, it's all about direct trades between parties, usually banks or brokers.
The Two Levels of the Forex Market
Inter-bank Market: This is where the big players like commercial banks trade among themselves. They use electronic platforms and this part of the market isn't really open to small-time traders like us.
Retail Market: This is our arena, where individuals and small businesses trade. We get into the market through online brokers or market makers.
Retail Forex Market and Market Makers
So, we join the market via online brokers or folks called market makers. They're kind of like middlemen, giving quotes and making trades happen for us. They're connected to the big guys in the inter-bank market and they manage their risks smartly.
When Can You Trade?
The Forex market is open 24 hours, and trading is busiest when major financial centers are open. The key trading sessions are:
Tokyo Session (8:00 AM-12:00 PM GMT)
London Session (12:00 PM-4:00 PM GMT)
New York Session (4:00 PM-8:00 PM GMT)
How's the Market Different Now?
Since that 2015 article, a few things have changed:
We've got more choices now with different market makers and brokers. This means better deals and trading conditions for us.
There's been a tech boom in trading platforms, tools for analysis, and even automated trading systems. This makes everything more efficient and easier to access.
Bodies like the CFTC in the US and ESMA in Europe are keeping a closer eye on things, making sure trading is fair and transparent.
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CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS, IN GENERAL, ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
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