How the FX market functions

Foreign Exchange is the world's largest financial market. It runs 24 hours a day and only closes for a few hours each week.

Other than the Chicago Mercantile Exchange (CME), where currency futures trade, there is no physical FX market. Rather the "market" is an interconnected network of bank traders, brokers, dealers and fund managers. Indicative and executable pricing is shared through electronic dealing platforms such as Reuters, Bloomberg EDS and proprietary platforms.

London remains the main foreign exchange trading Center with just over 50% of the flow. London is nicely situated to catch the end of the day in Asia and the beginning of the day in North America. As such, London foreign exchange traders typically put in 12 hour days.

In a 2010 BIS survey (http://www.bis.org/publ/rpfx10.htm), average daily FX turnover was calculated to be $4.0 trillion. To put this in perspective, the New York Stock Exchange, the world's largest equity market, traded approximately $153 billion daily in 2008.

The vast majority of FX trades (more than 90%) have nothing to do with international payments (whether for imports or exports) but are executed for speculative purposes and, to a lesser extent, hedging purposes.

Learn How to Read Currency Exchange Rates