Articles

Who are Currency Trading Marketplace Participants

There are two major categories of traders involved in the foreign exchange market:

  • The “Market makers”, consisting of financial enterprises which form the buying and selling prices of foreign exchange market and they are willing to trade with anyone who wishes.
  • The “Market takers”, consisting of businesses and individuals who agree to trade in foreign exchange transactions always at predetermined prices.

Depending on the nature of the traders, the foreign exchange market is divided into three sub-markets:

  • In a market characterized by a relatively small volume of transactions, in which individuals and non-financial companies involved and participate in international transactions.

In the interbank market in which banks or generally financial companies, as well as brokerage companies, participate with a minimum transaction amount which is usually quite high. Essentially, is the wholesale market in which exchange rates established at the balancing point between supply and demand.
There are three reasons for participating in the interbank market:

  • Adjustment and configuration of open foreign exchange positions at the desired level.
  • Making a profit.
  • Hedging all the risks from transactions made by financial companies in the first market.

Furthermore, the central banks with the participation of the commercial banks, participate on
a daily basis in the market, which at the end of each closing session, determine the exchange
rate (fixing) of the main foreign currencies.

  • Only banks or financial companies of different nationalities participate in the third market. That is why banks are setting up an international network of correspondent banks, to facilitate foreign exchange transactions.

Factors that Influence Prices in Currency Trading Marketplace

 

In an open economy, the formation of the exchange rate in relation to the currencies of other countries is determined based on the supply and demand for each currency.
Additionally, in the international economy there are certain relationships between economic variables and exchange rates. The main economic variables, are interest rates and rates of inflation. The relationships between the variables can be analyzed into the following categories:
1.Interest and exchange rates.
Interest rates in a currency and in foreign currency should be in a certain ratio so that the investment in either currency or the foreign currency the investor could expect to receive the same return. In this case the investor is indifferent about the choice of investment as there is no incentive to carried out a gainful activity. Otherwise the investor carry out a gainful activity to make a profit.
2. Inflation rates and exchange rates.
Exchange rates should be at a level of a particular relationship specific with inflation rates between different countries. Otherwise, both the purchasing power of the initial capital and the return on investment will be different depending on the choice of currency in which the investment was made. Otherwise, both the purchasing power of the initial capital and the return on investment will be different, depending on the choice of currency in which the investment was made.
3. Interest rates and inflation rates.
The effective interest rates must be in perfect balance between the various countries. Otherwise, there is an imbalance in the foreign exchange market, which is reflected either by increased demand or by devaluing pressures on a currency.
4. Spreads between lending and deposit rates
In this case it should be satisfied the equality relation between lending and deposit rates among different countries. If this relation does not exist and effective interest rates of one country are higher or lower from those of another country, pressures are exerted for the strengthening or not of the respective currency.

Consumer Confidence Index (CCI)

Consumer Confidence Index (CCI) started in 1967, published by The Conference Board to measure consumer confidence as the degree of optimism on the economy that consumers are expressing through their activities of spending and savings, while it is a measure of the consumer’s intuition or expectation of the future economic situation.
Consumer Confidence Index – plotted by

The Currency Trading Marketplace

The system of free floating exchange rates or forex trading or currency trading, describes the foreign exchange market through which individuals, companies and financial institutions trade currencies at a predetermined prices.
The main feature of the foreign exchange market is, that it is a decentralized and global international market, which operates on a 24-hour basis. Obviously this possibility arises from the existence of different financial centers, each one with different opening hours, allowing the hand-over from the closing center to the opening one.
In the strict sense of the term, in the foreign exchange market, take place the currency exchanges, while in the broad sense, take place all types of financial transactions in foreign currency, such as deposits, loans, etc.
Foreign exchange is defined as the total of banknotes and coins issued by the central bank of a foreign country, including foreign currency deposits and high liquidity of financial instruments such as bank checks.
The foreign exchange market performs four basic functions:

  • Participates in the conversion of money issued by the central bank of one country, into money issued by the central bank of another country.
  • Contributes to the liquidation and set-off of the transactions that have been made globally and internationally.
  • It is the area it would take to hedge out the position or the risks within the position, as a result of changes in exchange rates.
  • Provides international credit for the proper functioning and facilitation of worldwide trade.