The Forex is unique among financial markets in a number of ways. One is that it was traditionally used as an investment vehicle. He was, and still maintain a certain extent, a more utilitarian purpose. In today’s global economy, most companies have some degree of international exposure, creating the need to exchange one currency for another to complete transactions. For example, Honda builds its cars in Japan and exports to the United States, where American buyers eager to exchange their dollars for a new Honda. Part of this money has to make his way back to Japan to pay the factory workers who built the car, but first the dollars must be exchanged for Japanese yen as the currency of the Japanese factory workers paid in transactions such as these are provided by international banks and is conducted through a mechanism known as the foreign exchange market or currency. Since banks are used to facilitate such cross border transactions, which naturally want to be paid for their services. This payment is in the form of a purchase / sale – offering to buy the currency you want a slightly lower price they are willing to sell less and pocket the difference. Given the fact that more than $ 3 billion moves through the daily foreign exchange market, these seemingly small fees can add up to a sum.
From the 1970’s most major currencies in the world have been a clearing house (mostly) free-floating, taking into account the exchange rate to be determined by market forces, ie supply and demand. I say “mostly” because there have been times when the major central banks have intervened in the market to manipulate exchange rates by either buying or selling large amounts of its currency, but usually this only happens in extreme situations. There are also other central banks that decide to manage their currencies much more strict, but they are a minority in the developed world. So in most cases, this mechanism of exchange rate floating currencies fluctuate together allows more, and this in turn opened the door to speculation about the future movement of exchange rates. Intimate knowledge of banks’ foreign exchange market and its high level of funding allowed them to be the first to speculate in the currency market, and significantly increase your profits with it. An unfortunate consequence of this speculation, however, was that liquidity at times became scarce, and some necessary transactions could not be completed. To resolve this problem, banks turned to expand the number of market participants to include non-banks, generating enough order flow (cash distribution) to complete customer transactions, and also benefit these new markets, but less participants. These less-experienced participants in the Forex market for the first time included the big funds (such as the legendary Quantum Fund), but now also include your local retail forex.
Another unique feature of the Forex market is that it is a prescription (OTC) market, which means there is no central exchange (like a stock exchange) that transactions take place. In contrast, higher level transactions are done in the “interbank market”, which is a collection of larger funds center banks in the world, all free to trade currencies among themselves in any kind agree. Of course, it can be difficult to find their way through a maze, so the brilliant minds at major banks developed the electronic trading system (EBS) that participants can easily see what the rates of all participants are willing to face. A competitive system was also developed by Reuters (D2). Today, we prefer one over the other mostly based on what currency pair you want to trade with EBS used mostly for EUR / USD, USD / JPY, EUR / JPY, USD / CHF and EUR / CHF and Reuters D2 used for all other currency pairs. In 2006, EBS was acquired by ICAP. It should be noted that while these services provide a centralized information structure of prices, not a centralized exchange. Forex is still much more than an OTC market.
The second level of the market consists of small pieces of larger multinational institutions. That’s when, for example, a bank branch in the U.S. offers with another branch of the same bank, say, Japan. So when you walk into your local branch and want to currency exchange, which will give you a budget that is not exactly representative of the interbank exchange rate. You are free to shop around for a better budget, and would often be convenient to do so, since rates can vary significantly from one bank to another.
Most Forex brokers retail are part of the third tier, as they often face a single level of liquidity provider second. This is not always so, as some brokers retail offer direct access to multiple liquidity providers, so they are themselves part of the second level. This is particularly true of Electronic Communication Networks (ECN), the path to the retail traders usually orders directly to the interbank market.
