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Unformatted text preview: 15 ● The Foreign Exchange Market in the United States structure of the foreign exchange market ALL ABOUT... C H A P T E R 3 The foreign exchange market is by far the largest and most liquid market in the world. The estimated worldwide turnover of reporting dealers, at around $1 ½ trillion a day, is several times the level of turnover in the U.S. Government securities market, the world’s second largest market. Turnover is equivalent to more than $200 in foreign exchange market transactions, every business day of the year, for every man, woman, and child on earth! The breadth, depth, and liquidity of the market are truly impressive. Individual trades of $200 million to $500 million are not uncommon. Quoted prices change as often as 20 times a minute. It has been estimated that the world’s most active exchange rates can change up to 18,000 times during a single day. 2 Large trades can be made, yet econometric studies indicate that prices tend to move in relatively small increments,a sign of a smoothly functioning and liquid market. While turnover of around $1 ½ trillion per day is a good indication of the level of activity and liquidity in the global foreign exchange market, it is not necessarily a useful measure of other forces in the world economy.Almost two-thirds of the total represents transactions among the reporting dealers themselves—with only one- third accounted for by their transactions with financial and non-financial customers. It is important to realize that an initial dealer transaction with a customer in the foreign exchange market often leads to multiple further transactions, sometimes over an extended period, as the dealer institutions readjust their own positions to hedge, manage, or offset the risks involved. The result is that the amount of trading with customers of a large dealer institution active in the interbank market often accounts for a very small share of that institution’s total foreign exchange activity. Among the various financial centers around the world, the largest amount of foreign exchange trading takes place in the United Kingdom, even though that nation’s currency—the pound sterling—is less widely traded in the market than several others.As shown in Figure 3-1, the United Kingdom accounts for about 32 percent of the global total; the United States ranks a distant second with about 18 percent, and Japan is third with 8 percent. Thus, together, the three largest markets—one each in the European, Western Hemisphere, and Asian time zones—account for about 58 percent of global trading. After these three leaders comes Singapore with 7 percent. 1. I T I S THE W ORLD ’ S L ARGEST M ARKET Source: Bank for International Settlements....
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- Spring '12