Trading characteristics

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border

regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected

marketplaces, where different currency instruments are traded. This implies that there is not a single dollar rate but rather

a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very

close, otherwise they could be exploited by arbitrageurs instantaneously. A joint venture of the Chicago Mercantile Exchange

and Reuters, called FxMarketSpace opened in 2007 and aspires to the role of a central market clearing mechanism.

The main trading centers are in London, New York, Tokyo, Hong Kong and Singapore, but banks throughout the world participate.

Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins,

followed by the North American session and then back to the Asian session, excluding weekends.

There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by

actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation,

interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions.

Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time.

However, the large banks have an important advantage; they can see their customers' order flow.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is

traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price

of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US

dollars, as in 1 euro = 1.3045 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger

currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the

pair.

The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and

XXX/ZZZ.

On the spot market, according to the BIS study, the most heavily traded products were:

* EUR/USD: 28 %
* USD/JPY: 18 %
* GBP/USD (also called sterling or cable): 14 %

and the US currency was involved in 88.7% of transactions, followed by the euro (37.2%), the yen (20.3%), and the sterling

(16.9%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the

buyers.

Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange

market is thus far still largely dollar-centered. For instance, trading the euro versus a non-European currency ZZZ will

usually involve two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency

pair in the interbank spot market.