Foreign Exchange Markets and Currency Forwards › FX Market Structure

The foreign exchange market operates fundamentally differently from organized exchanges. Its structure explains how liquidity and pricing work, including who can access the market.

The FX market is a decentralized dealer market. Major banks act as market makers, quoting bid and ask prices at which they will buy and sell currencies. These banks trade with each other in the interbank market, the core of the FX ecosystem, and with their customers: corporations, asset managers, hedge funds, and smaller banks.

The key participants in the FX market include:

• Commercial banks: The largest players, acting as dealers and market makers. Banks like JPMorgan, Citi, UBS, and Deutsche Bank dominate interbank trading.
• Central banks: Intervene to influence their domestic currency's value or manage reserves. Central bank activity can move markets significantly.
• Corporations: Engage in FX to pay for imports, convert foreign revenues, or hedge future exposures from international operations.
• Asset managers and hedge funds: Trade currencies as an asset class or hedge foreign investments. Carry trades and momentum strategies are common.
• Retail traders: Individual speculators accessing the market through brokers, typically a small fraction of total volume.

Because major financial centers span different time zones, the FX market operates continuously from Sunday evening (when Sydney opens) through Friday evening (when New York closes), with trading following the sun around the globe.

The overlapping sessions are particularly important. The London-New York overlap (roughly 12:00-16:00 UTC) sees the highest trading volumes, as the two largest financial centers operate simultaneously. During these periods, liquidity is deepest and bid-ask spreads are typically tightest.

The FX market divides into two primary segments based on settlement timing:

• Spot market: Transactions settle "on the spot," meaning within two business days (T+2) for most currency pairs. The spot market accounts for roughly 30% of FX turnover.
• Forward market: Transactions settle at a predetermined future date, from one week to several years ahead. Forwards, FX swaps, and currency swap together dominate FX turnover.