Forex is the abbreviation of the word foreign exchange, which expresses the conversion of the currencies of two countries against each other. After forex transactions became popular over time, not only currencies but also commodities entered into forex platforms and started to be traded as forex products. Forex market is the world’s largest and most liquid market. According to BIS (Bank of International Settlement) data, the daily trading volume of the forex market is around 5.5 trillion USD. Due to the leverage factor in Forex markets, the fact that even small investment amounts can be traded has caused the market to become so interesting. Although there are countries and institutions in the world where 1:400 leverage ratio is used and even 1:1000 leverage ratio is used, it is not possible to be successful in this market with such high leverage ratios.
Although Forex markets are similar to stock and futures markets in many aspects, they are markets with very different and unusual features. We will see the differentiating features of forex markets in the following stages of our article, but the best way to explain what aspects of forex that operates according to the features of the over-the-counter market will be to compare the functioning of the forex markets with the features of the organized markets we are used to. In order to better explain the concept of Forex, let’s take a brief look at the general characteristics of organized markets, where BIST (stock market Istanbul) or VIOP (futures and options market) are cited as examples. In organized markets;
- The buyer and seller do not know each other.
- The operating principles are standard. Items subject to these trading principles are trading hours, transaction sizes, order types, leverage, initial margins, maintenance margins, and clearing conditions.
- Buyer and seller match on the exchange.
- A clearing house acts as a seller to the buyer and buyer to the seller.
- The parties do not need to trust each other.
After taking a look at the features of the organized markets, let’s move on to the answer to our question, what is forex, let’s first take a look at the features of the over-the-counter markets in order to understand what forex is. In over-the-counter markets;
- Buyer and seller know each other.
- The parties determine the principles of the transaction.
- There is no transaction standard.
- Mutual trust is essential.
- Exchange transactions are made by the parties.
Up to this point of our article, we have given preliminary information about what is forex. Features of forex, which is the main product of over-the-counter markets;
- It is at the center of the over-the-counter markets.
- Investors should trust the brokerage firm.
- The brokerage firm determines the transaction prices.
- The registration of the completed transactions is kept by the intermediary institution.
- All transaction features are determined by the brokerage house.
HOW ARE PRICES DETERMINED IN FOREX MARKETS?
Banks around the world have their own unique cash flow associated with each currency. There may be a lot of foreign currency inflows to banks as well as outflows. In this case, banks want to sell their excess currency in the interbank market and buy other currencies they need in order to regulate their cash flows and meet the cash needs of their customers and themselves. Banks are present as market makers in almost all currency pairs and spot commodities such as gold and silver. These banks ensure that prices are formed in the forex markets. Prices are transmitted from these international banks, which make up the prices, to forex intermediary institutions through networks. The networks we talk about in our forex article are called forex price networks. Examples of these channels are Reuters, Bloomberg, Currenex, Hotspot FX, Flextrade etc. companies can be shown. Forex companies put their own income (mark up) on the prices coming from these networks and transmit them to the end user, namely the investors.
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