How does FX trading occur?
All currencies are traded as pairs. Whatever you are doing against one currency (i.e. buying, selling) you are simultaneously doing the opposite against some other currency. Example: Euro. EUR/USD (“euro/dollar”). Or, EUR/JPY (“euro/yen”), etc. As an example if one says they are going "long EUR/USD” that means they are buying the euro and selling an equivalent amount of dollars. The expectation here is fo the euro to rise vis-à-vis the dollar.
From fixed exchange to floating rates
Most of industialized world went to a free floating non-convertible currency system in 1971 when President Nixon closed the “gold window.” Since then currencies were allowed float freely against one another as opposed to being exchanged at a "fixed" rate.
This system replaced the prior system, which was referred to as the Bretton Woods conference. That was a monetary system established after WWII that fixed international currencies against the U.S. dollar. There was also an international gold standard at the time.
Floating rates allow more policy space
Under floating FX, monetary and fiscal policy are independent of the exchange value of the currency. (Very important!) This allows for more flexibility; more policy space. “Imbalances” are resolved in a change in the foreign exchange value of the currency and policy makers are free to regulate monetary and fiscal policy as necessary to ensure growth and full employment.
FX is an "over the counter" market place
The FX market is an inter-bank or inter-dealer network. It is considered an over-the-counter (OTC) market, meaning that transactions are not conducted on an exchange like many equity stock such as the New York Stock Exchange (NYSE) or the CME. OTC trades exist as agreements made between two parties that agree to trade via telephone or electronic network.
Leading FX centers
As FX trading has evolved, several locations have emerged as market leaders. Currently, London, England contributes the greatest share of transactions with over 32% of the total trades. Other trading centers—listed in order of volume— are New York, Tokyo, Zurich, Frankfurt, Hong Kong, Paris, and Sydney.
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