London, England: Where the Forex Market Lives
If the Foreign Exchange Market has a Hometown, it has to be London
The foreign exchange (forex) or currency market does not exist like most other financial markets you may be familiar with, such as the New York Stock Exchange or the NASDAQ. Both of these markets have a central location and a central exchange, but the forex market exists as a global financial market instead of a centrally located one.
The term that we use for this is 'over-the-counter' (OTC), meaning that the market itself exists as a large teeming collection of interconnected bank computer servers (which is also the reason that this market is commonly referred to as the interbank market). If you want to trade the foreign currency market, instead of finding a broker that can 'plug you in' to a centrally located exchange (as you would do with the stock market), you actually use you own internet-enabled computer to gain access to your trading platform via a big bank's computer servers. In effect, since the forex market itself IS all of these computers, you are actually enlarging the market when you choose to add your own computer and funds to the mix.
The forex market does a very large amount of trading volume, the equivalent of over USD $2 trillion on a normal trading day. The United Kingdom has a dominating share of normal foreign exchange activity, and according to a report by IFS London the UK accounts for nearly 34% of all global currency trading, which is twice as much as the forex trading volume in the United States. Astoundingly, over twice as many dollars are traded in the UK than in the US!
With so much money flowing through London, this has made it the unofficial banking and currency exchange center of the world. Hundreds of the world's largest corporations have their European headquarters in London, as well as large financial regulatory bodies such as the Financial Services Authority.
The Bank of England, which sets the interest rates and mitigates inflation for the entire United Kingdom has also set up shop in London. And let's not forget the UK's other financial markets, such as the London Stock Exchange and the London Metal Exchange. The London Stock Exchange is notably the most international of all of the world's stock exchanges, as over 3000 companies in over 60 countries trade on its markets.
So what does London's status as the foreign exchange center of the world mean for you as an individual currency trader? Two things: First, since nobody can work at their computer 24 hours a day to monitor the forex market, many traders choose to trade during only one market open. Since the London market open (3AM to 10AM Eastern time) has the largest amount of trading volume, it also tends to have the strongest moves and there will not be as many false trading signals.
Second, it means that you should pay particular attention to any important geopolitical news or economic data coming out of the UK, since you know that thousands of the world's biggest institutional forex traders at banks and investment funds will be responding to it by either buying or selling.
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