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Unit 3: Foreign Exchange Market and Exchange Rates

The Foreign Exchange Market is worldwide in scope and the major world’s trading centres are Notes
in Tokyo, Singapore, New York, Frankfurt, Zurich and San Francisco. Many other cities are also
major forex market centres.
All these centres are in constant contact with each other and are connected through highly
sophisticated telecommunications networks. Banks, professional dealers and brokers obtain
exchange rate quotes on desktop computer screens and communicate with each other by
telephone, computer, fax and telex. The communication network connecting all the centres is
very efficient such that an exchange rate change in one centre has an almost immediate impact
on forex trading in other centres.

3.1 Evolution of Foreign Exchange Market

The Foreign Exchange Market started evolving during the 1970s when the countries all over the
world gradually switched to floating exchange rate from their existing exchange rate regime,
which remained fixed as per the Bretton Woods system till 1971.
According to the Bank for International Settlements, April 2007, average daily turnover in
global foreign exchange markets is estimated at $3.98 trillion. Trading in the world’s main
financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main
Foreign Exchange Market turnover was broken down as follows:

$1.005 trillion in Spot transactions
$362 billion in outright Forwards

$1.714 trillion in foreign exchange Swaps
$129 billion estimated gaps in Reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion,
or 34.1% of the total, making London by far the global center for foreign exchange. In second and
third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for
6.0%. In addition to “traditional” turnover, $2.1 trillion was traded in derivatives.
Table 3.1 gives the Top 10 Currency traders. The ten most active traders account for almost 80%
of trading volume, according to the 2008 Euromoney FX survey.

Table 3.1: Top Ten Currency Traders (2012)

Rank Name Volume
1 Deutsche Bank 15.64%
2 Barclays Capital 10.75%
3 UBS AG 10.59%
4 Citi 8.88%
5 JPMorgan 6.43%
6 HSBC 6.26%
7 Royal Bank of Scotland 6.20%
8 Credit Suisse 4.80%
9 Goldman Sachs 4.13%
10 Morgan Stanley 3.64%

Source: http://forex1.ucoz.com/index/top_10_currency_traders/0-11

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