Foreign Exchange Markets

Demetri Papacostas and Francesco Tonin

For those not involved in the FX market, it must be very difficult to get a palpable sense of what it is. Exchanging one currency for another happens when you go to the bank or the automated teller machine (ATM) and exchange money for your vacation; it happens on the second floor of some shopping mall in Singapore by some guy in a kiosk – no computer, and he makes a tighter price than JPMorgan; it happens on the fancier streets of Buenos Aires, where every five steps someone is yelling “cambio”; it happens when IBM sells its artificial intelligence (AI) services to a Chinese municipality; and it happens when the Federal Reserve Bank buys and sells currency to manipulate FX rates and implement interest rate policy.

FX is both omnipresent and a self-perpetuating creation. Although it permeates every aspect of global interactions, the heart of the system is really a market concentrated into a few major players, located in a few central locations and trading just a handful of currencies. In this chapter, we will explore who trades FX, where it happens, how big the market is, and look at just a few of the conventions and traditions. Some of these qualities have led to behaviour that