Forex: Foreign Exchange Market
Forex is a term used to describe the Foreign Exchange Market. The idea of trading foreign currency is not a new concept, and can be dated back to when man first introduced currency as opposed to exchanging commodities.
The nature of forex market on the other hand has seen significant changes in recent years in terms of how efficiently stock is traded, and how this influences expansion. Technological advancements in the 21st century have heralded the explosive growth of the industry. Thanks to the internet, information transmission and the ability to transfer funds online, the forex market has not only become the largest market in the world, but has also established it’s presence online, with electronic trading platforms and online based trading revolutionising the industry.
The industry itself can be categorized into two groups: retail and institutional. Similarily to retail and wholesale, retail customers are those representing the general public, and individual customers, whereas instituional customers are predominantely made up of financial institutions and corporate clientelle. Thanks to the transforming nature of the forex market with a focus on online operations, retail based customers have been able to enter the industry with ease, giving rise to an increase in electronic trading. Although this has allowed the industry to continue expanding in growth, the issue of fraud has become a problem due to inexperience amongst individual traders, and their vulnerability in the market.
On the other side of the spectrum, institutional trade, primarily amongst banks makes up 80% of all trading in the forex market. Banks may be influenced to trade in the forex market for several reasons, including investement in foreign financial assets, facilitation of trade, investor speculation, short-term deposit conversion and central bank intervention.
Inter-bank trading is loosely organised but does have to adhere to industry standards in terms of regulatory requirements such as documenting transactions and remaining a reliable trading partner. Reputation and relationships are important assets in the trading market, and is an important factor in influencing the trade between given banks. Fraud, although not common does occur, but remains stealthy and cunning.
Central banks on the other hand fullfil a different purpose in the market, and focus on regulating and balancing the market as opposed to profit maximisation. In the United States, the Federal Reserve and the Treasury are both part of the forex market, and their main agenda is to prevent hikes in market trends and ensuring constancy and liquidity.
Hedging is a tool used by players in the forex market, which involves locking in funds in a given currency to avoid possible financial loss. The most popularly traded currency is the US dollar, which comprises 63% of all currency trading in the world. The Bank For International settlements (BIS) indicated that daily turnover in the forex market is $2 trillion, with London leading as the main centre, facilitating 31% of all global trade, with North America following at 21%.
China has been critisized in the global forex market for purposefully limiting the value of the Yuan to sustain it’s booming export growth. This influences greater profits when exchanged for higher-value currencies in the global market, and because China is the largest holder of foreign exchange reserves in the world, industralized nations are warranting the value of the Yuan to become pliable.