The Composition of the Forex Market and Other Major Currencies

The Forex market is distinguished from other financial markets by two things; one is that it is not traditionally used as a financial vehicle. It was, and still - to some extent - a more utilitarian goal. In today's globalized economy, the majority of business kind of global presence creates the need for replacement currency for another in order to complete transactions.

For example, Honda manufactures its vehicles in Japan and exported to the United States of America, where the U.S. consumer replace his dollars to buy a new Honda car. Some of these funds must return to Japan to pay for factory workers who manufacture the car, but in the beginning those dollars must exchange to yen, because this is the currency in which paid factory workers in Japan wages. The conduct of such transactions is done by international banks through a mechanism known as "foreign exchange market" or "Forex". Since the banks are accustomed to the conduct of such international transactions, it is natural that the banks demand for the service fees. Those payments comes in the form of spread bet / request - where they are offered to buy the required currency at slightly less than the asking price, and keep the difference.  More than $ 3 billion is moved daily in the Forex markets, these seemingly small fees that may coalesce to become huge sums.

Since the seventies of the last century, the majority of the world's major currencies are going (mostly) on the free-floating exchange method, allowing for the exchange rates to be determined based on market forces, which is the supply and  the demand. We say "mostly" because there were some times in which some central banks of some countries to intervene in the market to manipulate currency exchange rates through their sale or purchase of large quantities of the currencies of their country, such things naturally happen only in the most extreme cases. There are also other central banks choose to manage their currencies in a more rigorous way, but such banks are considered a minority in the contemporary world. So, in most cases, the free-floating method of exchange permits of volatile currencies against each other more, and this opens the door to expectations of future movement of currency rates. Strong knowledge of the Forex market banks and the large level of available capital to them, enabling them to be the first ones that speculating in the Forex market, and significantly increase their profits in this way. However, the unwelcome consequences of those speculators were the lack of liquidity in some cases, so they were not able to complete some of the necessary transactions. 

In order to solve this problem, the banks increased the number of participants in the market through included those of unbanked , and thus get a large influx of (the distribution of liquidity) in order to complete customer transactions, and also in order to get profit from new participants and non-experts in the market . One of the inexperienced traders in Forex initially large cash funds (such as the famous Quantum Fund), but today it includes even local Forex broker.

Another unique feature of the Forex market is that market directly "on the table", in the sense that there is no central initiative (such as the stock market) in which transactions are. Instead, transactions are first-class in "internal banking market", which is a combination of the largest central banks in the financial world, which all of it allowed to trade currency among themselves on the prices at which they agree upon. It may be difficult to know the way in this big maze, so the smart people in the leading banks to develop "electronic brokerage system" EBS, to allow the participants to see other prices, which is accepted by other traders. As a competitive system was developed by "Reuters" (D2) .Today ,one over the other often depending on the currency pair you want to trade preferred, as the EBS usually used in pairs with the euro / U.S. dollar, the U.S. dollar / Japanese yen, the U.S. dollar / Swiss franc, the euro / Swiss franc, while using "Reuters D2" for all other currency pairs. In 2006 ICAP acquired EBS. Must be understood that the combination of these services were offering centralized pricing information, they did not constitute a central exchange. And Forex Market “is still on the table" dramatically.

The second layer of the market is made up of smaller parts of large global institutions. Such that the bank branch in the United States to deal with another branch of the same bank in Japan, for example. When you head to the local bank branch and request a currency converter, they will evaluate the price which is not worth the price of intermediary banks exactly. And you can search for the best prices, and it is wise to do so, as the prices can be different dramatically from one bank to another.

The majority of Forex brokers are considered retail third class, where they usually deal with the liquidity provider and one of the second layers. But this is not a permanent situation, some retail brokers offer direct access to several liquidity providers, and that they are part of the second layer.