The foreign-exchange market, or forex, is the largest market in the world by volume. That is, more money exchanges hands on the foreign exchange than in any market in the world. Some $1.5 Trillion is exchanged daily compared to $25 billion on the New York Stock Exchange.
Across the world, the daily volume of stock exchanges is only one-third of the volume of the foreign exchange market! It should be easy to see by all traders, retail and institutional alike, how large the foreign exchange market has grown to be.
So What is the Foreign Exchange Market?
The most elementary and perhaps the most accurate explanation for the foreign exchange market is that it is a market where people buy and sell money. Currency pairs such as the GBP/USD or the USD/JPY are simply the value of one currency against another.
The pairs represent the value of the Great British Pound against the Dollar (GBP/USD) and the US Dollar against the Japanese Yen (USD/JPY). A EURUSD (Euro to the US Dollar) quote of 1.2000 would mean that 1 Euro is worth 1.2 Dollars. Simple, right?
An Uncentralized Market
There is no central processing market for the foreign exchange. Instead, the market is made up only of interbanks. These interbanks are responsible for competing foreign-exchange trades and transactions from one currency to another.
Because the market exists solely between banks, there is no centralized place for each exchange, nor is there a common market. Instead, transactions take place between two individual banks, not between a bank, market, then another bank. This market basics the foreign-exchange market a over-the-counter (OTC) marketplace.