Foreign Exchange Trading
You are entering the world of foreign exchange or Forex, a world where trillions of dollars are traded each day. It is by far the world’s largest and most liquid market. Once you enter you find a contrast between foreign exchange trading and trading on a listed exchange. You can do an Internet search and find the names, and securities traded on the various exchanges throughout the world. When you look for the foreign exchange market there is no such listing. Foreign exchange trading is decentralized yet it does have a structure.
What we have are connected computerized centers in the major cities of the world. Also unlike major listed exchanges that have set hours for trading, foreign exchange trading is done 24 hours a day. There is another major difference between trading on listed exchanges and foreign exchange. If you want to buy IBM for example you would place an order on the New York Stock Exchange and get a specific quote. It doesn’t make a difference if you are buying 100 shares or 100,000 shares. The foreign exchange works quite differently. There are layers of buying and selling.
Foreign Exchange Interbank System
The major central banks and large trading institutions in the cities above are linked through a private computerized trading network. This is called the Interbank Network. They trade among themselves and set prices for the next lower layer of broker/dealers. Obviously, the Interbank traders control the market and have the tightest bid and ask prices or spreads. They then mark up the prices and sell the currencies to the next lower level of broker/dealers. These broker/dealers have trading platforms throughout the world. The broker/dealers then mark up their bids and asks for the retail customer or speculator.
Here again we find a major difference between trading securities and Forex. When you buy a stock for example you are buying a single unit. When you trade Forex you are trading currency pairs. You are buying one currency and selling another simultaneously. The major pairs traded are the US dollar, British Pound, euro, Japanese Yen, Swiss Franc and Canadian dollar. You would see a quote such as CAD/USD. You are always buying the first currency or Canadian dollar or base currency and selling the last one or US dollar or quote currency. This is called a “spread.” Forex trading is rapid fire. Any political or economic event or natural disaster anywhere in the world and prices can change in the blink of an eye.