There is no central location of the foreign exchange market, often referred to as the forex (FX) market. Transactions in the FX market take place in many different forms, 24 hours a day, through different channels all over the globe; existing wherever one currency is exchanged for another.
The forex market is situated within the following areas:
- retail forex brokers
- central banks
- commercial businesses
Retail Forex Brokers
These brokers offer speculative trading to the individual retail trader. This area of the forex market is very small compared to the total volume of currency exchanged worldwide.
By purchasing and selling currencies, central banks try to control their money supply, interest rates and inflation. Whether official or not, nations often have target exchange rates for their currencies, and a nation's central bank can often use their reserves of national and foreign currency to try and stabilize the market for their currency.
Whenever a company has to purchase from or sell to a company in a foreign nation, a foreign exchange transaction is likely to occur. For example, a U.S. based company may need to purchase Euros to pay an invoice to a French company; or the French company may have to purchase U.S. dollars to pay a U.S based invoice. In both of these cases, a foreign exchange transaction needs to occur. Companies that deal with foreign customers or suppliers often take this one step further and purchase or sell currencies as a hedge against future exchange rate movement. By locking in today's exchange rates, companies can take exchange rate risk out of the equation.
The interbank market makes up the largest portion of the forex market and is inclusive of the above areas of trading. Customers often turn to the banks to intermediate their foreign exchange transactions, and banks often trade their own accounts as well.
There is no central location that forex trading occurs in. For this reason, there is no central body controlling prices and actions of many players. This is a new and lucrative area for speculation, but investors must heed the risks that are taken when entering it.