Main Currency Markets

Currencies are traded over an organized exchange or "over the counter" (OTC). Most of the foreign exchange deals take place "over the counter," between banks and other market participants. Exchange traded currency instruments make up a very small portion of the entire foreign exchange volume.

1. Exchange traded currencies

A popular exchange where currency futures are traded is the Chicago Mercantile Exchange (CME) in the United States. In the CME, standard contract sizes are traded in the International Money Market (IMM). Furthermore, a central clearing house is in charge of matching transactions between buyers and sellers. There are various disadvantages to trading currency futures (read more about the advantages of trading currencies over stocks and futures).

2. Forex market

Compared to the exchange market, the OTC foreign currency market is traded globally by a large number of traders and organizations. In the OTC market, market participants determine who they want to trade with depending on trading conditions, attractiveness of prices and reputation of the trading counterparty. The foreign exchange OTC market is the largest and most popular market in the world. The figure below represents the results of a study conducted in 1998 by the Bank for International Settlements (BIS) showing global forex activity. While the daily worldwide trading volume was estimated at about US$1.49 trillion, the daily volume of currency futures was only estimated at US$12 billion.

Despite the fact that the British Pound is only the fourth most widely traded foreign currency, it is evident from the chart below that the United Kingdom is the financial center with the greatest portion of worldwide forex activity. The UK accounts for about 32% of all activity, followed by the United States with 18%, and Japan with 8% (figures obtained from the chart below).