PipStory

There is a regular recurrence of controversy related to currency speculators and their effect on currency devaluations and national economies. Nevertheless, it has been argued by the economists including Milton Friedman that speculators ultimately are a stabilizing influence on the market and they are performing an important function and that is they are providing a market for hedgers and they are transferring risk from those people who don’t wish to bear it, to those who do. It is thought by other economists such as Joseph Stiglitz that this argument is based more on politics and a free market philosophy than on economics.

Main Professional Speculators

The main professional speculators are large hedge funds and other well capitalized "position traders". Individual traders could act as "noise traders", according to some economists,  and a more destabilizing role can be played by them than larger and better informed actors.

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Here I will explain you about algorithmic trading , fundamental trading and technical analysis in foreign exchange.

Algorithmic Trading in Foreign Exchange

In the FX market Electronic trading is growing, and nowadays algorithmic trading is becoming much more common. As estimated by financial consultancy Celent, by 2008 up to 25% of all trades by volume had been executed using algorithm, which has been increased from about 18% in 2005.

It is required for an algorithmic trader that he should be fully aware of all the potential frauds by the broker. A check should be included in part of the weekly algorithm to see if the amount of transaction errors at the time when the trader is losing money occurs in the same proportion as when the trader would have made money.

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The fluctuations in FX rates in a floating exchange rate regime are explained by the following theories:

1. International parity conditions
2. Balance of payments model 
3. Asset market model

None of the models that has been developed so far have achieved success to explain FX rates levels and volatility in the longer time frames. The above models make us understand that the exchange rates are affected by many macroeconomic factors and in the end currency prices are a result of dual forces of demand and supply.

For any given currency Supply and demand, and thus its value, are not influenced by any single element but rather than that they are influenced by several factors. These elements are generally divided into three categories:

1. economic factors,
2. political conditions
3. market psychology

Economic factors

The economic factors include:

• economic policy, that are disseminated by government agencies and central banks,
• economic conditions, that are generally elaborated through economic reports,
• and other economic indicators.

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For the majority of FX trades there is no unified or centrally cleared market , and there is very little cross-border regulation. As the currency market is having the over-the-counter (OTC) nature, there are rather a number of interconnected marketplaces, where the trading of different currencies instruments take place. This shows that rather than having  a single exchange rate there are a number of different rates (prices), and that depends on what bank or market maker is trading, and where the trade is taking place. In practice the rates are often very close, because if this is not done then they could be instantaneously by the arbitrageurs . Due to the fact that the market is dominated by London, a particular currency’s quoted price is usually the London market price.

Although the main trading center is London, but the importance of New York, Tokyo, Hong Kong and Singapore cannot be denied. Throughout the world banks participate. Throughout the day currency trading happens continuously; as there is an end of Asian trading session, the European session begins, that is followed by the North American session and then back to the Asian session, excluding weekends.

Causes of Monetary Flows

Usually actual monetary flows as well as by expectations of changes in monetary flows causes the fluctuations in exchange rates. These monetary flows are usually caused by changes in gross domestic product (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 they are released on scheduled dates, so same news have to be accessed by many people at the same time. However, the large banks enjoys an important advantage; and that is they are able to see their customers’ order flow.

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Unlike a stock market, where it is required that all participants have access to the same prices, the foreign exchange market has been divided into levels of access. The inter-bank market is at the top, which is constituted of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and often the players outside the inner circle do not know about them.

The difference that is present in between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This happens due to volume. If a trader can provide a guarantee of large numbers of transactions for large amounts, then they can possibly demand a smaller difference between the bid and ask price, and it is known as a better spread. The size of the “line” i.e. the amount of money with which they are trading, determine the levels of access that make up the foreign exchange market. The top-tier inter-bank market accounts for 53% of all transactions. After that often there are smaller investment banks, that are followed by large multi-national corporations, large hedge funds, and even some of the retail FX-metal market makers.

Banks

Every day both the majority of commercial turnover and large amounts of speculative trading is provided by the interbank market. Daily billions of dollars are being traded by a large bank. On behalf of customers some of this trading is undertaken, but much is conducted by proprietary desks, trading for the bank’s own account. Nowadays, however, much of this business has moved on to more efficient electronic systems.

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At present, one of the largest and most liquid financial markets in the world is the foreign exchange market. Large banks, central banks, currency speculators, corporations, governments, and other financial institutions are all included among its traders. There is  a continuous growth in the average daily volume in the global foreign exchange and related markets.

It has been reported by the Bank for International Settlements that the daily turnover has been over US$ 3.2 trillion in April 2007 . Since then, we can see  continuous growth in the market. According to Euromoney’s annual FX Poll, between 2007 and 2008 volumes grew a further 41% .

London as Global Center for Foreign Exchange

Out of the $3.98 trillion daily global turnover, in London trading  has been accounted for around $1.36 trillion, or we can say that it is 34.1% of the total, and this makes London by far the global center for foreign exchange. In second place it is New York, as trading in New York is accounted for 16.6% and on third places we have Tokyo where the trading has been accounted for 6.0%. Moreover, $2.1 trillion was traded in derivatives  in addition to “traditional” turnover.

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Trade of currencies is done by the foreign exchange market, which is also known as currency, forex, or FX. It provides an ease to banks and other institutions for buying and selling currencies.

Basic Purpose of Foreign Exchange Market

The basic purpose of the foreign exchange market is to facilitate international trade and investment. A foreign exchange market provides help to businesses for converting one currency to another. For instance, a U.S. business is permitted by it to import European goods and pay Euros, even though the income of  business is in U.S. dollars.

In a typical foreign exchange transaction what happens is that a quantity of one currency is purchased by a party by paying a quantity of another currency. The modern foreign exchange market has been started initiating during the 1970s, at that time countries gradually switched to floating foreign exchange from the previous exchange regime, which does not change and remained fixed as per the Bretton Woods system.

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