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The Foreign-exchange Market Introduction Characteristics,Foreign Ex...
The Foreign-exchange Market Introduction Characteristics,Foreign Exchange Ins...
From anu ranjan
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The Foreign Exchange Market in the United States
structure of the foreign exchange market
ALL ABOUT...
CHAPTER 3
The foreign exchange market is by far the largestand most liquid market in the world.Theestimated worldwide turnover ofreportingdealers,at around $1½trillion a day,is severaltimes the level ofturnover in the U.S.Government securities market,the world’ssecond largest market.Turnover is equivalentto more than $200 in foreign exchange markettransactions,every business day ofthe year,forevery man,woman,and child on earth!The breadth,depth,and liquidity ofthemarket are truly impressive.Individual trades of $200 million to $500 million are not uncommon.Quoted prices change as often as 20 times aminute.It has been estimated that the world’smost active exchange rates can change up to18,000 times during a single day.
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Large tradescan be made,yet econometric studies indicatethat prices tend to move in relatively smallincrements,a sign ofa smoothly functioning andliquid market.While turnover ofaround $1½ trillion per dayis a good indication ofthe level ofactivity andliquidity in the global foreign exchange market,itis not necessarily a useful measure ofotherforces in the world economy.Almost two-thirds of the total represents transactions among thereporting dealers themselves—with only one-third accounted for by their transactions withfinancial and non-financial customers.It isimportant to realize that an initial dealertransaction with a customer in the foreignexchange market often leads to multiple furthertransactions,sometimes over an extended period,as the dealer institutions readjust their ownpositions to hedge,manage,or offset the risksinvolved.The result is that the amount oftradingwith customers ofa large dealer institution activein the interbank market often accounts for a verysmall share ofthat institution’s total foreignexchange activity.Among the various financial centers aroundthe world,the largest amount offoreign exchangetrading takes place in the United Kingdom,eventhough that nation’s currency—the poundsterling—is less widely traded in the market thanseveral others.As shown in Figure 3-1,the UnitedKingdom accounts for about 32 percent oftheglobal total;the United States ranks a distantsecond with about 18 percent,and Japan is thirdwith 8 percent.Thus,together,the three largestmarkets—one each in the European,WesternHemisphere,and Asian time zones—account forabout 58 percent ofglobal trading.After thesethree leaders comes Singapore with 7 percent.
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Source: Bank for International Settlements.Note: Percent of total reporting foreign exchange turnover,adjusted for intra-country double-counting.
Shares of Reported GlobalForeign Exchange Turnover, 1998
United KingdomUnited StatesJapanSingaporeHong KongGermanySwitzerlandFranceOthers
FIGURE 3-1
The Foreign Exchange Market in the United States
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During the past quarter century,the concept of a twenty-four hour market has become a reality.Somewhere on the planet,financial centers areopen for business,and banks and otherinstitutions are trading the dollar and othercurrencies,every hour ofthe day and night,aside from possible minor gaps on weekends.In financial centers around the world,businesshours overlap;as some centers close,othersopen and begin to trade.The foreign exchangemarket follows the sun around the earth.The international date line is located in thewestern Pacific,and each business day arrivesfirst in the Asia-Pacific financial centers—first Wellington,New Zealand,then Sydney,Australia,followed by Tokyo,Hong Kong,andSingapore.A few hours later,while marketsremain active in those Asian centers,tradingbegins in Bahrain and elsewhere in the MiddleEast.Later still,when it is late in the businessday in Tokyo,markets in Europe openfor business.Subsequently,when it is earlyafternoon in Europe,trading in New York andother U.S.centers starts.Finally,completing thecircle,when it is mid- or late-afternoon in theUnited States,the next day has arrived in theAsia-Pacific area,the first markets there haveopened,and the process begins again.Thetwenty-fourhourmarketmeansthatexchangeratesandmarketconditionscanchangeatanytimeinresponsetodevelopmentsthatcantakeplaceatanytime.Italsomeansthattradersandothermarketparticipantsmustbealerttothepossibilitythatasharpmoveinanexchangeratecanoccurduringanoffhour,elsewhereintheworld.Thelargedealinginstitutionshaveadaptedtotheseconditions,andhaveintroducedvariousarrangementsformonitoringmarketsandtradingonatwenty-fourhourbasis.SomekeeptheirNewYorkorothertradingdesksopenThe large volume oftrading activity inthe United Kingdom reflects London’s strongposition as an international financial centerwhere a large number offinancial institutionsare located.In the 1998 foreign exchange marketturnover survey,213 foreign exchange dealerinstitutions in the United Kingdom reportedtrading activity to the Bank ofEngland,compared with 93 in the United States reportingto the Federal Reserve Bank ofNew York.In foreign exchange trading,Londonbenefits not only from its proximity to majorEurocurrency credit markets and other financialmarkets,but also from its geographical locationand time zone.In addition to being open whenthe numerous other financial centers in Europeare open,London’s morning hours overlap withthe late hours in a number ofAsian and MiddleEast markets;London’s afternoon sessionscorrespond to the morning periods in the largeNorth American market.Thus,surveys haveindicated that there is more foreign exchangetrading in dollars in London than in the UnitedStates,and more foreign exchange trading inmarks than in Germany.However,the bulkoftrading in London,about 85 percent,isaccounted for by foreign-owned (non-U.K.owned) institutions,with U.K.-based dealersofNorth American institutions reporting 49percent,or three times the share ofU.K.-ownedinstitutions there.
structure of the foreign exchange market
ALL ABOUT...
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The Foreign Exchange Market in the United States
twenty-fourhoursaday,otherspassthetorchfromoneofficetothenext,andstillothersfollowdifferentapproaches.However,foreign exchange activity does notflow evenly.Over the course ofa day,there is acycle characterized by periods ofvery heavyactivity and other periods ofrelatively lightactivity.Most ofthe trading takes place when thelargest number ofpotential counterparties isavailable or accessible
on a global basis
.(Figure 3-2 gives a general sense ofparticipation levels inthe global foreign exchange market by trackingelectronic conversations per hour.) Marketliquidity is ofgreat importance to participants.Sellers want to sell when they have access to themaximum number ofpotential buyers,andbuyers want to buy when they have access to themaximum number ofpotential sellers.Business is heavy when both the U.S.marketsand the major European markets are open—thatis,when it is morning in New York and afternoonin London.In the New York market,nearly two-thirds ofthe day’s activity typically takes place inthe morning hours.Activity normally becomesvery slow in New York in the mid- to lateafternoon,after European markets have closedand before the Tokyo,Hong Kong,and Singaporemarkets have opened.Given this uneven flow ofbusiness around theclock,market participants often will respond lessaggressively to an exchange rate development thatoccurs at a relatively inactive time ofday,and willwait to see whether the development is confirmedwhen the major markets open.Some institutionspay little attention to developments in less activemarkets.Nonetheless,the twenty-four hourmarket does provide a continuous “real-time”market assessment ofthe ebb and flow of influences and attitudes with respect to the tradedcurrencies,and an opportunity for a quick judgment ofunexpected events.With manytraders carrying pocket monitors,it has becomerelatively easy to stay in touch with market
structure of the foreign exchange market
ALL ABOUT...
Note: Time (0100-2400 hours, Greenwich Mean Time) Source: ReutersElectronic conversations per hour (Monday-Friday, 1992-93)
10AminTokyoLunchhour in TokyoLunchhour in LondonEuropecominginAmericascominginAsiagoingout Londongoingout AfternooninAmericaNew Zealand comingin6 PminNew York TokyoComingin
The Circadian Rhythms of the FX Market
05,00010,00015,00020,00025,00030,00035,00040,00045,000
PeakAvg
2300210019001700150013001100900700500300100
FIGURE 3-2
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Foreign Exhange Market in Usa5
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