What are the Different Sectors in the Forex Market?
Posted on January 15, 2008
Filed Under Forex Education |
Within the Forex market, there are various different sectors, some as follows:
Currency Spot Market - This is where a spot deal takes place between two parties who deliver a certain amount of different currencies to each other, based on an agreed exchange rate, within two business days of the deal date.
Currency Forward Market -This is where a forward transaction takes place between two parties who deliver a certain amount of different currencies to each other, based on an agreed exchange rate, past two business days of the deal date.
Currency Futures Market - This is a special case of the forward market whereby the deals mature past the spot value date. Other than these few sectors, there are also the Swap and Option market.
Of all the above sectors, the Currency Spot market is the biggest with 48% market share followed by Currency Swaps at 39%.
The Spot market with almost half of the entire Forex market share is where many private individuals speculated in the (Long) buying and (Short) selling of currencies with the intention to make profits.
It is estimated that about 70%-90% of Spot Forex transactions is speculative. In simple term - the individual or institution that buys or sells the currency pairs has no intention of actually taking delivery of the currency. In reality, their sole purpose is to speculate on the movement of that particular currency to generate profits.
In recent years, many traders have switched from currency Futures market trading to Spot market trading. The Spot market offers better liquidity and generally has a much lower trading cost than currency futures. Banks and brokers in the Spot market can quote markets 24 hours a day. Furthermore, the Spot Forex market is not burdened by exchange and NFA (“National Futures Association”) fees, which are generally passed on to the client in the form of higher commissions. For these reasons, virtually all professional traders and institutions conduct most of their Forex dealing in the currency Spot market rather than in the currency future market.
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