In the last years, the foreign
exchange market has expanded from one where banks would execute
transactions between themselves to one in which many other kinds
of financial institutions like brokers and market-makers participate
including non-financial corporations, investment firms, pension
funds and hedge funds.
Its' focus has broadened from servicing importers and exporters
to handling the vast amounts of overseas investment and other
capital flows that currently take place. Lately foreign exchange
day trading has become increasingly popular and various firms
offer trading facilities to the small investor.
Foreign exchange is an 'over the counter' (OTC) market, that
means that there is no central exchange and clearing house where
orders are matched. Geographic trading 'centers' exist around
the world however and are: (in order of importance) London, New
York, Tokyo, Singapore, Frankfurt, Geneva & Zurich, Paris
and Hong Kong. Essentially foreign exchange deals are made between
participants on the basis of trust and reputation to deliver
on an agreement. In the case of banks trading with one another,
they do so solely on that basis. In the retail market, customers
demand a written legally accepted contract between themselves
and their broker in exchange of a deposit of funds on which basis
the customer may trade.
Some market participants may be involved in the 'goods' market,
conducting international transactions for the purchase or sale
of merchandise. Some may be engaged in 'direct investment' in
plant and equipment, or may be in the 'money market,' trading
short-term debt instruments internationally. The various investors,
hedgers, and speculators may be focused on any time period, from
a few minutes to several years. But, whether official or private,
and whether their motive be investing, hedging, speculating,
arbitraging, paying for imports, or seeking to influence the
rate, they are all part of the aggregate demand for and supply
of the currencies involved, and they all play a role in determining
the exchange rate at that moment.