The foreign exchange market or FOREX market exists whenever one currency is traded against another. The FX market is an over-the counter market (OTC) which means that there is no centralized exchange (like for example New York Stock Exchange) where currencies are bought and sold. Instead banks and fx dealers are connected around the world via internet, fax and telephone forming the FX market.
The FX market is structured around a hierarchy with priority given participants with superior credit access and high transaction volume. At the top of the hierarchy is the interbank market where central banks, world's largest banks (Deutsche Bank, Barclays, Citibank, etc) and credit institutions trade with each other directly through Electronic Brokering System (EBS) or Reuters brokering system. The technological developments of the 1990's has created another branch of FOREX - online FX market. Online forex brokers are able to access the interbank market breaking down large lots (in billions) which are exchanged between banks and delivering them in smaller pieces (10K) to their retail clients and individual traders.
FX market characteristics:
FOREX is a very liquid market
There are always ready and willing buyers and sellers for the currency you wish to trade. High liquidity give you the ability quickly buy or sell a particular item without causing a significant movement in the price, allowing for minimal slippage, that is your trade get executed at the quoted price and not lower if you sell the currency pair and not higher if you buy.
Large trading volume
Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study Triennial Central Bank Survey 2004, which is much larger than that of futures or equities having daily volumes of 437.5 and 192 billion respectively.
Open 24-hours
Worldwide nature of the FOREX market with major trading centers (London, New York, Tokyo, etc) covering all the time zones allows the FX market to be open virtually 24-hours a day (except for weekends). Traders can access the market any time and act on global developments.
Lower Transaction Cost
In the equities market a trader has to pay a spread and a broker’s commission which differ from $20-$120 depending on the volume of the trade. The electronic nature of the FX market allows the trader to deal directly with the market maker (trading desk) paying only the spread (the difference between the price at which a bank or market maker will sell ( "offer") and the price at which a market maker will buy ("bid") from a customer), thus eliminating commission payments.
