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Learning outcomes.
After watching this video you'll be able to understand the size of the fx market,
how it functions, and be able to compare fx markets related to other markets such
as equity and fixed income markets.
You'll be able to understand what liquidity means and
how it affects currency markets.
>> Foreign exchange market, more often than not called the forex market,
or simply the fx market is the most traded financial market in the world.
We like to think of the forex market as the big boss of financial markets.
The forex market is the crossroads for international capital, the intersection
through which global commercial and investment flows have to move.
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International trade flows such as, let's say, a Swiss electronic company
purchases Japanese made equipment were the original basis for
the development of the forex markets.
Today however, global financial and investment flows dominate trade
as the primary non-speculative source of forex market volume.
Whether it's an Australian pension fund investing in US Treasury bonds or
a British insurer allocating assets to the Japanese equity markets.
Or a German Conglomerate purchasing a Canadian manufacturing facility.
Each cross border transaction passes through the forex market at some
stage or the other.
More than anything else, the forex market is a trader's market.
It's a market that's open round the clock,
six days a week, enabling traders to act on news and events as they happen.
It's a market where a half a billion dollar trade can be
executed in a matter of seconds.
And may not even move markets or prices noticeably.
Try having to buy or sell half a billion of anything in any other market and
see how prices react.
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Average daily currency trading volume is actually more than $2 trillion per day.
That's a mind boggling number.
That's 2 followed by 12 zeros.
And that's a lot of zeros, no matter how you slice it.
To give you some perspective on that size, it's about 10 to 15 times the size of
daily trading volume on all the world's stock markets combined, all put together.
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While commercial and
financial transactions in the currency market represents huge nominal sums,
they still pale in comparison to amounts based on speculation.
By far, the vast majority of currency trading volume is based on speculation.
Traders buying and selling for short turn gains based on minute to minute,
hour to hour, and day to day price fluctuations.
Estimates are that more than 90% of daily trading volume is derived from
speculation.
Meaning commercial or investment based effects trades account for
less than 10% of daily global volume.
The depth and breadth of the speculative market means that the liquidity of
the overall forex market is unparalleled among global financial markets.
The bulk of spot currency trading,
about 75% of volume takes place in the so-called major currencies,
which represents the world's largest and most developed economies.
Additionally, activity in the forex market frequently functions on a regional
currency block basis where the bulk of trades take place between the US block,
yen block, and the euro block,
representing the three largest global economic regions.
Liquidity refers to the level of market interest, the level of buying and
selling volume available at any given moment for a particular asset or security.
The higher the liquidity or the deeper the market, the faster and
easier it is to buy or sell a security.
From a trading perspective, liquidity is critical concentration
which determines how quickly prices move during trades and over time.
A highly liquid market like forex market can see large trading volumes
transacted with relatively minor price changes.
On the other hand, an illiquid or thin market tends to
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move prices more rapidly on relatively lower trading volumes.
A market that only trades during certain hours represents a very, very,
very less liquid or a very thin market.
But as I said before, fx market is really the big boss of financial markets.
And the kind of volumes that you get to see more than $2 trillion in a day is
something that you don't get to see in all stock markets combined,
put together, or in bond markets, or in commodity markets.
It's really the big daddy of financial markets.
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Vaidya NathanLecturer
