The foreign exchange market is a trading currencies market that operates worldwide but in a decentralized manner. Each country’s financial center acts as an anchor for currency trading between two traders in a twenty-four-hour continuous operation on weekdays. Each financial center values the different currencies relatively. Its purpose is to primarily assist international investment and trade by converting one currency to another currency. It helps direct speculation on the difference of interest rates between 2 currencies and on the actual value of the currencies.

The foreign exchange transactions happen over the counter, meaning sellers and buyers deal with each other. There is no clearing house or central exchange. Participants to the forex market are large banks, institutional investors, corporations, retail investors, central banks, currency speculators, governments, and other financial institutions.

The foreign exchange market is divided into levels of access where the interbank market is on the top of such levels. Securities dealers and large commercial banks transact with each other. The difference between the ask prices and bids in this level is not known to players outside. 53% of the overall forex volume is said to be transacted in the interbank market where a trader, who guarantees huge numbers of transactions for huge amounts, can demand a better spread. Spread is the difference between bids and ask price. A better spread means the difference between the prices is smaller. Next to the interbank market level are the smaller banks, large multinational corporations, large hedge funds, and retail forex market makers.

The economics of the foreign exchange market is influenced by market psychology, political conditions, and economic factors. In cases of unsettling international events, traders will move their assets towards currencies and investments that are considered safe such as gold, Swiss franc, and the US dollar. Anticipations about the new government administration and political instability can also have profound effects on currency trading. Any political upheaval or destabilization of governments can affect the value of a country’s currency negatively. Economic policies and conditions also affect currency trading. A robust national economy will have a higher currency value while a country in economic crisis will experience a drop in the value of its currency.

The most liquid financial market across the world is the foreign exchange market. It is a unique market with large volume of highly liquid assets being traded yet with very low margins of profit compared to other financial markets. It is considered to be closest to perfect competition.

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