The foreign exchange
(currency or forex or FX) market exists wherever one
currency is traded for another. It is by far the largest
financial market in the world, and includes trading
between large banks, central banks, currency
speculators, multinational corporations, governments,
and other financial markets and institutions. The
average daily trade in the global forex and related
markets currently is over US$ 3 trillion.
Because foreign exchange
is an OTC market where brokers/dealers negotiate
directly with one another, there is no central exchange
or clearing house. The biggest geographic trading centre
is the UK, primarily London.
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). The
top-tier inter-bank market accounts for 53% of all
transactions.
Electronic trading is
growing in the FX market, and algorithmic trading is
becoming much more common. There is much confusion about
the technique. According to financial consultancy Celent
estimates, by 2008 up to 25% of all trades by volume
will be executed using algorithm, up from about 18% in
2005.
A forex scam is any
trading scheme used to defraud individual traders by
convincing them that they can expect to gain an
unreasonably high profit by trading in the foreign
exchange market, which would be a zero-sum game were it
not for the fact that there are brokerage commissions,
which technically make forex a "negative-sum" game.
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