• Where is the currency market located?

• When does trading take place?

• How do people trade without a central market?

WHERE IS THE CURRENCY MARKET LOCATED?

So you’re interested in trading forex. One of the things you might wonder is: where does this trading take place? 

I’m sure you’ve heard about the stock market going up or down. That’s because there is a stock market. There’s a New York Stock Exchange in New York, and a Tokyo Stock Exchange in Tokyo. These act as a central exchange where stocks are listed and trading takes place. The market opens at a certain time and closes at a certain time, just like your local supermarket.

Similarly with metals, there’s the London Metal Exchange where you can see the prices that traders pay for copper or aluminum.

But the forex market is different. There is no central exchange where trading takes place. There is no official start and no official close. There’s nothing but a lot of computers linked up to a lot of other computers. It’s called an “over-the-counter” market, but really there’s no counter either. 

Forex trading takes place virtually among market participants. It’s all down to keyboards and computers.

WHEN DOES TRADING TAKE PLACE?

Forex trading takes place around the globe 24 hours a day. It starts off Monday morning at around 8 AM in Wellington, New Zealand, and keeps going until around 4 or 5 PM Friday afternoon in San Francisco. That’s some 147 hours later. 

During that time, banks, companies, speculators and other market participants are trading among themselves more or less continuously, linked together by electronics.

The main trading centers are the same as the main financial centers of the world. In Asia, that’s Tokyo, Hong Kong and Singapore. In Europe, it’s London, Frankfurt and Zurich; and in the US, it’s New York and San Francisco. 

There’s more activity sometimes than there is other times. For example, in the early morning in Asia, there aren’t that many people trading yet. Things get going as the day progresses. They get even busier during the time that both London and Tokyo are open for business. Then things quiet down a bit after the Asian day ends, but that doesn’t last too long. The busiest time of day is when New York is just opening and London and the rest of Europe are still going strong. Then London passes its business onto the States, European traders go home for the day, and it’s just the US and Latin America for some time.

HOW DO PEOPLE TRADE WITHOUT A CENTRAL MARKET?

You might wonder, how does trading take place if there’s no marketplace and if it’s all over the world? It’s mostly done electronically, with banks at the center. There are in effect two separate but very much interconnected forex markets: dealer-to-dealer and dealer-to-customer. This is the normal structure of over-the-counter (OTC) markets, where dealers warehouse risk and serve as counterparties, ie provide liquidity, to end users.

As the Bank for International Settlements (BIS) said in its Triennial Survey of the Foreign Exchange Market, 

For three decades, two electronic brokers, Reuters (now Refinitiv) Matching and Electronic Broking Services (EBS) Market, have been especially important for the inter-dealer spot market. Often referred to as the "primary venues," they…have been the main sources of reference prices for the entire spot market. But there are also more than 30 secondary venues in the dealer-customer market segment, which has grown strongly in recent years, especially when compared with primary market activity. Customers can also trade directly with more than 20 dealers via proprietary single-dealer platforms (SDPs) or obtain direct prices streams from more than a dozen principal trading firms (PTFs).

…But the distinction between the core inter-dealer and dealer-customer market segments has become somewhat blurred over time. This reflects a proliferation of multilateral trading venues, a growing variety of execution methods, and some non-bank actors emerging as liquidity providers alongside dealers.

According to the BIS, some 40% of all trading in spot foreign exchange is among dealers. This kind of dealing provides crucial information for ascertaining market conditions and obtaining reference prices for the wider FX market. In particular, trading on the two “primary venues” is the key place for “price discovery,” i.e. finding out at what price supply matches demand, especially when the market becomes unusually volatile and liquidity on other marketplaces deteriorates. Currency trading on the futures markets, such as the Chicago Mercantile Exchange (CME), is also important. The volume of trading in currency futures often exceeds that of the OTC market, making it also an important source of price discovery. 

Sometimes bank A might have a slightly different price than bank B, but there are a lot of traders looking for these kinds of differences. They’ll quickly jump in and buy here and sell there, and bring the price back into line. This is called arbitrage, and believe me, you can’t do it at home – these companies use ultra-fast computers and special connections to enable them to spot these anomalies and trade on them in milliseconds. In short, forex trading is mostly (72%) done electronically nowadays by people clicking on a mouse. For big trades, a company may get on the phone and place an order with a salesperson, but that’s not the way the vast majority of trades happen nowadays. There was even a book written about forex trading reflecting that fact called Why Aren’t They Shouting?. The title came from a question that a client asked when touring the trading floor. She had expected people standing there screaming, shouting prices at each other, slamming phones down, etc., but all she saw was a lot of people sitting quietly staring at computer screens.

SUMMARY

The FX market is a virtual market. Trading takes place through computers linked all over the world. The market operates 24 hours a day, five days a week, starting in New Zealand on Monday morning and ending in San Francisco on Friday evening.