Think of a market which does a daily turnover of around US$ 3billion on an average on a sustained basis having a liquidity crunch. This statement can be sort of a click for the novice but weaker volumes doing high values render the forex market to reverse trend sooner than later but for the moment will be suspect to absorb all ask deals. A trader will get stuck up here and will incur losses.
The above scenario is a strange one despite having a great price run but normal cases do differ and both the entities, market size and liquidity, do work complementing each other. In a way the enormous size of the market can be attributed to the high volume turnouts. It is this high volume that sees all deals execute completely without slippage. If not for the 24 hour trade the market would have suffered huge losses considering the enormous size.
Some Forex Market Statistics Let us see some statistics that pertain to the market size. Forex market did a daily average turn over of US$1,770 billions as of 2004 which crossed $2,000 the very next year. This figure does not count the global trades which accounts for another $829 billions. The global forex market does another $1.26 trillion turnover in forex derivatives and close to a trillion dollars in swaps. This is ten folds greater the size of the total turnover on all the equity markets of this world put together.
The trading value and size is also increasing at a breakneck speed. It jumped 38% between April 2005 and April 2006 and has swelled 100% since 2001. The top 10 forex centers do a total of 73% of the trading volume and of which, the most prominent one, London accounts for 31.3% overall.
If this is one side of the story, you have large market players on the other. Deutsche Bank garners a mind boggling turnover of about 17%, while UBS and Citi Group account for another 20% of the daily turnover. These figures include all types of orders and clients including different national central banks which are not there for business purposes.
What Does This Mean To The Retail Trader? Larger market participants work on spread (difference amount between ask and bid price). Although the volumes are quite huge they are mostly in electronic figures which can be carried forward to next settlement cycles absorbing losses.
A retailer can take comfort that s/he will not get stuck-up so easily unless one is not prepared to book a marginal loss.
* Extreme liquidity of the market * Geographical dispersion * Larger numbers of traders (and the variety of) in the market * Length of trading hours (24 hours a day, except on weekends) * Lower profit margins compared to other fixed income markets (profits can occasionally be higher based on trading volume) * Trading volume amounts * Variety of factors directly affecting exchange rates
The forex market is considered to be the epitome of ideal or perfect competition. Based on statistics compiled by the Bank for International Settlements (BIS), average daily trading for this time of year stands at $3.21 trillion in volume. This volume was broken down into four categories, namely:
1. $1.714 trillion in forex swaps - OTC derivatives with short-term interest rates 2. $1.005 trillion in spot transactions - using one currency to purchase another for purposes of immediate rather than future delivery 3. $362 billion in outright forwards - agreements established between two parties to purchase or sell assets for a pre-agreed upon price 4. $129 billion in estimated reporting gaps
The concept of forex traded futures contracts came into being in 1972 at the Chicago Mercantile Exchange, and has progressively grown into the viable segment of the forex exchange that they are today. According to the Wall Street Journal, futures now account for approximately 7% of the total volume traded on the forex exchange.
In the past, the most significant growth in forex trading volume occurred between April of 2005 and April of 2006, when the market witnessed a 38% increase in the volume of trading, which equated to a doubling since 2001. It has been theorized that there were two significant factors contributing to this growth. One was that the foreign exchange has grown in importance as an asset class, and the other was the increase in the amount of fund management assets, namely hedge funds and pension funds.
Additionally, the onset of trading currencies on the internet has also grown in popularity by virtue of the internet platforms which has made it easier for retail traders to become more involved in the "trading" industry as well as increasing the forex traffic factors. And this was just one of the different trade execution venues that have come into being, although it is probably the most significant.
According to the Wall Street Journal Europe, 73% of the entire trading volume is the direct result of the 10 most active traders in the forex market. The chart below lists these 10 traders, their country of origin, their ranking, and their percentage of volume: Rank Name Volume 1 Deutsche Bank 19.30% 2 UBS AG 14.85% 3 Citi 9.00% 4 Royal Bank of Scotland 8.90% 5 Barclays Capital 8.80% 6 Bank of America 5.29% 7 HSBC 4.36% 8 Goldman Sachs 4.14% 9 JPMorgan 3.33% 10 Morgan Stanley 2.86% Interestingly enough, eight of the 10 listed hail from either the United States or the United Kingdom. Naturally, the Swiss bank is also one of these 10.
Both Jason Uvios & Justin Stewart are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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