The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.

Until forex recently, foreign exchange forex brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS (now owned by ICAP ), Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange , Dukascopy - Swiss FX Marketplace , FXMarketSpace ,Bloomberg , and TradeBook(R). forex The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most

Commercial forex companies An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants. forex

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. [1] Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks.

Market size and liquidity:

The foreign exchange market is unique because of

• its trading volume, forex
• the extreme liquidity of the market, forex
• the large number of, and variety of, traders in the market, forex
• its geographical dispersion, forex
• its long trading hours: 24 hours a day (except on weekends), forex
• the variety of factors that affect exchange rates . forex
• the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)

According to the BIS , [1] average daily turnover in traditional foreign exchange markets is estimated at $3,210 billion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below: forex

This $1.88 trillion in global foreign exchange market "traditional" turnover was broken down as follows:

• $1,005 billion in spot transactions forex
• $362 billion in outright forwards forex
• $1,714 billion in forex swaps forex
• $129 billion estimated gaps in reporting forex

In addition to "traditional" turnover, $2.1 trillion was traded in derivatives .

Average daily global turnover in traditional foreign exchange market transactions totaled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world's equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and forex has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund forex management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the forex foreign exchange market. [4]

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, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006. RPP

The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe , (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips . For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $100,000.

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization forex strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency

Investment management firms

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization.

Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.