In the last years, the foreign exchange market has expanded from one where banks would execute transactions between themselves to one in which many other kinds of financial institutions like brokers and market-makers participate including non-financial corporations, investment firms, pension funds and hedge funds.
Its' focus has broadened from servicing importers and exporters to handling the vast amounts of overseas investment and other capital flows that currently take place. Lately foreign exchange day trading has become increasingly popular and various firms offer trading facilities to the small investor.
Foreign exchange is
an 'over the counter' (OTC) market, that means that there is no central
exchange and clearing house where orders are matched. Geographic trading
'centers' exist around the world however and are: (in order of importance)
London, New York, Tokyo, Singapore, Frankfurt, Geneva & Zurich, Paris
and Hong Kong. Essentially foreign exchange deals are made between participants
on the basis of trust and reputation to deliver on an agreement. In the
case of banks trading with one another, they do so solely on that basis.
In the retail market, customers demand a written legally accepted contract
between themselves and their broker in exchange of a deposit of funds
on which basis the customer may trade.
Some market participants
may be involved in the 'goods' market, conducting international transactions
for the purchase or sale of merchandise. Some may be engaged in 'direct
investment' in plant and equipment, or may be in the 'money market,' trading
short-term debt instruments internationally. The various investors, hedgers,
and speculators may be focused on any time period, from a few minutes
to several years. But, whether official or private, and whether their
motive be investing, hedging, speculating, arbitraging, paying for imports,
or seeking to influence the rate, they are all part of the aggregate demand
for and supply of the currencies involved, and they all play a role in
determining the exchange rate at that moment.
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