Home Courses Course-01 4 – Size and Liquidity Of The Forex Market

4 – Size and Liquidity Of The Forex Market

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Introduction

Forex is the market for trading currencies. Also, it is the largest market in the world in terms of volume, but it is not a centralised market.

The financial markets have a physical location or a central exchange centre where all deals are done. For example, the US stock market has the New York Stock Exchange (NYSE), and the UK has the London Stock Exchange (LSE). Whereas, the Forex market, on the other hand, neither has a physical location nor a central exchange. Instead, the Forex market is considered as an Over-the-Counter (OTC) market or an interbank market.

It is referred to as an interbank market because this market runs electronically, within a network of banks, and is traded 24 hours. So, basically, the forex market is spread across the entire world with no central location or such. Also, it can be traded anywhere as long as one has an internet connection with them. Therefore, due to these factors, the Forex market is the largest in terms of size and liquidity.

When we refer to market liquidity, we mean the volume or size of the transactions. When a market has high liquidity, it means people can buy or sell large amounts of an asset with almost no effect on the movement of the price.

Forex Market Currency Distribution

We know that the Forex market is the largest in terms of size. But, what are the figures of different currencies; how are they distributed and where is the money flowing the most.

Consider the below graph, which represents the currency distribution in the Forex market.

Note: The total percentage of currencies totals to 200% instead of 100% because two currencies are involved in each transaction.

From the above bar graph, it can be ascertained that the USD is the most traded currency as it takes up 85% share of all the transactions per day. This percentage is so high that the second most traded currency is less than half of the most traded currency. That is, EUR stands next to the USD, which constitutes only 39% of all trading transactions. Following EUR are the JPY, GBP, AUD, CHF, and CAD which stand at 3rd, 4th, 5th, 6th, and 7th position, holding a percentage of 19, 13, 7.5, 6.5, and 5 respectively.

Forex Market World Reserves

From the above numbers, it would have been clear how USD plays a major role in the forex market; as it is the most traded currency. Another thing to consider in the forex market is the world foreign exchange reserves. Well, again the US dollar tops the list in FX reserves; as it comprises 64% of the world’s foreign exchange reserve according to the International Monetary Fund (IMF). In other words, every investor, business, and the central bank is interested in flowing an extremely large amount of cash into the US dollar.

Following the USD are currencies like GBP, JPY and EUR.

Forex Market Liquidity

With numerous advantages in the forex market, many traders and investors take part in trading. This is the reason; there is high liquidity in this market. Also, liquidity makes it extremely easy for everyone to buy and sell currency pairs.

Some of the highly liquid currency pairs in the forex market are:

  • EUR/USD
  • GBP/USD
  • USD/JPY
  • EUR/GBP
  • AUD/USD
  • USD/CAD
  • USD/CHF
  • NZD/USD

These pairs are also known as major currency pairs. So, if you trade in any of these pairs, you can easily buy/sell significantly large lot sizes for the exact price you are looking for.

Does the Forex market have any physical location or central exchange center?

Correct! Wrong!

Which is the most traded currency in the forex market?

Correct! Wrong!

What is the percentage difference between the most traded currency and the second most traded currency?

Correct! Wrong!

Which is the least traded major currency in forex according to the above graph?

Correct! Wrong!

The US dollar comprises of ___ of the World’s Foreign Exchange Reserve.

Correct! Wrong!

Which one of the below is not a highly liquid currency pair.

Correct! Wrong!

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