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Stock Market Operations

Notes the availability of enormous leverage to increase the value of potential movements. In the forex
market, leverage can be as much as 250:1. Higher leverage can be extremely risky, but because
of round-the-clock trading and deep liquidity, foreign exchange brokers have been able to make
high leverage an industry standard in order to make the movements meaningful for FX traders.
Extreme liquidity and the availability of high leverage have helped to spur the market’s rapid
growth and made it the ideal place for many traders. Positions can be opened and closed within
minutes or can be held for months. Currency prices are based on objective considerations of
supply and demand and cannot be manipulated easily because the size of the market does not
allow even the largest players, such as central banks, to move prices at will.

The forex market provides plenty of opportunity for investors. However, in order to be successful,
a currency trader has to understand the basics behind currency movements. The goal of this unit
is to provide a foundation for the currency markets.

14.1 The Forex Market

The foreign exchange market is the “place” where currencies are traded. Currencies are important
to most people around the world, whether they realize it or not, because currencies need to be
exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want
to buy cheese from France, either you or the company that you buy the cheese from has to pay
the French for the cheese in euros (EUR). This means that the U.S. importer would have to
exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for travelling. A
French tourist in Egypt can’t pay in euros to see the pyramids because it’s not the locally
accepted currency. As such, the tourist has to exchange the euros for the local currency, in this
case the Egyptian pound, at the current exchange rate.
The need to exchange currencies is the primary reason why the forex market is the largest, most
liquid financial market in the world. It dwarfs other markets in size, even the stock market, with
an average traded value of around U.S. $2,000 billion per day. (The total volume changes all the
time, but as of April 2004, the Bank for International Settlements (BIS) reported that the forex
market traded U.S. $1,900 billion per day.)
One unique aspect of this international market is that there is no central marketplace for currency
exchange. Rather, trade is conducted electronically over-the-counter (OTC), which means that
all transactions occur via computer networks between traders around the world, rather than on
one centralized exchange. The market is open 24 hours a day, five and a half days a week, and
currencies are traded worldwide in the major financial centres of London, New York, Tokyo,
Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney – across almost every time zone.
This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo
and Hong Kong. As such, the forex market can be extremely active any time of the day, with
price quotes changing constantly.

14.1.1 Spot Market and the Forwards and Futures Markets

There are actually three ways that institutions, corporations and individuals trade forex: the
spot market, the forwards market and the futures market. The spot market always has been the
largest market because it is the “underlying” real asset that the forwards and futures markets are
based on. In the past, the futures market was the most popular venue for traders because it was
available to individual investors for a longer period of time. However, with the advent of
electronic trading, the spot market has witnessed a huge surge in activity and now surpasses the
futures market as the preferred trading market for individual investors and speculators. When
people refer to the forex market, they usually are referring to the spot market. The forwards and

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