It has many names: the currency market, forex market, spot market, FX market, foreign exchange market. All of these are the many names that people use to refer to the “world’s largest financial market.”
Some may say, “If it’s the world’s largest market … then why haven’t I heard of it and been able to invest in it?”
Well, these days you can invest in it even though many people still don’t realize it. However, it is a relatively new market to the retail investor even though it opened up to the retail market back in 1998 but hardly any retail investors knew of it back then.
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But it wasn’t always that way. Institutions, pension funds, hedge funds, etc., have been trading in the currency market since the 1970s. So it’s not a new market … just new to most of the public.
Just how large is this market? Every three years, the Bank of International Settlements does a survey of the foreign exchange market. They released their latest findings late last month.
Here are some interesting facts about the FX market:
The forex market trades about $4 trillion a day. That’s more than all of the stock markets of the world combined.
The BIS stated that the volatility in the FX market continues to be high due to QE 2 in the U.S. and the debt crisis in Europe. So the movements in this market are still enormous.
The market has grown around 20 percent since the last BIS survey in 2007. In the three years previous, it grew 72 percent and then 56 percent in the three-year period previous to that. What a huge amount of growth.
The EUR/USD currency pair is the most liquid financial instrument in the world, trading about $1 trillion each day, which represents about 28 percent of the overall market share. So we’re not talking thin markets by any stretch.
In fact, you will find that you get better fills on your orders in this market over most any other market due to the vast amount of volume in the FX market.
By the way, I know there is a lot of talk of the dollar losing its reserve currency status — and I have no doubt that day is coming. But I do find it interesting that the dollar still comprised 85 percent of all FX transactions (down from 86.8 percent in 1998). So while that is technically a drop, it’s not a sizable one yet.
Therefore, while many people may hate the dollar profusely and see it going down — they’re still not deserting it just yet.
The next most used currency is the euro. It comprises 39 percent of FX transactions. So at this point, it’s far from taking the greenback’s place too.
Now many of you may think that since the dollar is still the world’s reserve currency that that the U.S. would also be the largest foreign exchange center of the world too, but we’re not.
The U.K. actually is still the largest foreign exchange center. Its share of the market has grown by about one percent every year for the last 10 years. So there is much more FX trading and transactions still going on over there, on the other side of the pond, than there is here in the U.S. The U.K. still conducts transacts about 46 percent of all FX trades/transactions.
However, the U.S. does take the second spot. The U.S. has 24 percent of the market. Coming in third place is Japan but the U.S. has actually been taking market share from Japan. Back in 1998, Japan held 9 percent of the market. Today it holds just more than 3.5 percent of the market share.
On a side note, I find it interesting that Singapore is growing as an FX center. They now transact as much business as Switzerland does (both at about 3 percent market share). Australia is also growing as an FX hub. Their share has doubled since 1998 to 1.5 percent.
So the world is starting to catch on and participate more and more in this vast market.
Now one of the big changes that has happened in the FX market is regulation. And that regulation has gotten stiffer most every year during the last couple of years. This has had a huge effect upon retail forex firms and caused a lot of consolidation in the industry.
For instance, back in 2007 there were 47 U.S. retail FX firms. Today there are 11 of them. Back in 2005 Japan used to have over 500 FX firms; today it has around 70 retail FX firms.
Those of you who have been reading my articles for a long time know that I always tell you to stick with the largest firms out there. Now you see why.
What I find interesting is that most financial markets didn't grow at all or didn't grow much during the financial crisis. The FX market still continued to push forward. The BIS doesn’t expect that to change anytime soon either.
Therefore, if you’ve never checked into the forex market before, there’s never been a better time to check it out.
The market is starting to come to a point of maturity to where it actually has a couple of FX firms now that just went public on the NYSE (FXCM and Gain Capital).
I believe during the next couple of years you will see more FX firms go public. The ones that don’t go public will likely get bought out with the capital infusions that the public FX firms get. It’s an exciting time in the FX market. I hope you’ll be joining us.
About the Author: Sean Hyman
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