How Does Foreign Exchange Differ From Other Markets?
How Does Foreign Exchange Differ From Other Market? Currency exchange rates are determined by various factors, including the economic climate and expectations about future values. The demand and supply of a certain currency can be influenced by expectations of future values, and this can have a major impact on the rate of exchange. The FX market is highly speculative, and the prices of currency fluctuate daily. However, it is important to keep in mind that there are many factors that influence the prices of a currency.
Different levels of access
The foreign exchange market is divided into different levels of access. The most liquid market is the interbank foreign exchange market. This is made up of major commercial banks, securities dealers, and individuals. The spreads in this market are razor-thin and not known to anyone outside of the inner circle. As one progresses down the levels of access, the difference between bid and ask prices increases. The more volume there is, the higher the spread.
In contrast, the foreign exchange market is divided into three levels. The top tier is the interbank market, which is accessed by the largest commercial banks and securities dealers. In this level, spreads are razor-thin and hardly visible to those outside of the inner circle. The lower tiers are populated by smaller banks, hedge funds, and retail market makers. The size of each market is determined by the amount of liquidity available to each.