The forex market is the largest financial market in the world, trading around $1.5 trillion each day. Trading in the forex is not done at one central location, but is conducted between participants by phone and electronic communication networks (ECNs) in various markets around the world.
The market is open 24 hours a day from 5 p.m. EST on Sunday until 4 p.m. EST on Friday because currencies are in high demand. The international scope of currency trading means that there are always traders across the globe who are making and meeting demands for a particular currency.
Currency is also needed around the world for international trade, by central banks and global businesses. Central banks have particularly relied on foreign-exchange markets since 1971 — when fixed-currency markets ceased to exist because the gold standard was dropped. Since that time, most international currencies have been “floated” rather than tied to the value of gold.
Economic and political instability and infinite other perpetual changes also affect the currency markets. Central banks seek to stabilize their country’s currency by trading it on the open market and keeping a relative value compared to other world currencies. Businesses that operate in multiple countries seek to mitigate the risks of doing business in foreign markets and hedge currency risk.
Businesses enter into currency swaps to hedge risk which gives them the right, but not necessarily the obligation, to buy a set amount of a foreign currency for a set price in another currency at a date in the future. They are limiting their exposure to large fluctuations in currency valuations through this strategy.
The ability of the forex to trade over a 24-hour period is due in part to different international time zones and the fact trades are conducted over a network of computers, rather than any one physical exchange that closes at a particular time. For instance, when you hear that the U.S. dollar closed at a certain rate, it simply means that that was the rate at market close in New York. That is because currency continues to be traded around the world long after New York’s close, unlike securities.
Securities such as domestic stocks, bonds and commodities are not as relevant or in need on the international stage and thus are not required to trade beyond the standard business day in the issuer’s home country. The demand for trade in these markets is not high enough to justify opening 24 hours a day due to the focus on the domestic market, meaning that it is likely that few shares would be traded at 3 a.m. in the U.S.
The forex market can be split into three main regions: Australasia, Europe and North America, with several major financial centers within each of these main areas. For example, Europe is comprised of major financial centers such as London, Paris, Frankfurt and Zurich. Banks, institutions and dealers all conduct forex trading for themselves and their clients in each of these markets.
Each day of forex trading starts with the opening of the Australasia area, followed by Europe and then North America. As one region’s markets close another opens, or has already opened, and continues to trade in the forex market. These markets will often overlap for a few hours, providing some of the most active period of forex trading. So for example, if a forex trader in Australia wakes up at 3 a.m. and wants to trade currency, they will be unable to do so through forex dealers located in Australasia, but they can make as many trades as they want through European or North American dealers.
The Bottom Line
Currency is a global necessity for central banks, international trade and global businesses, and therefore requires a 24-hour market to satisfy the need for transactions across various time zones. In sum, it’s safe to assume that there is no point during the trading week that a participant in the forex market will not potentially make a currency trade.
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