Forex is the shortening of foreign exchange and means the conversion of one currency into another currency. As Forex trading rose into popularity over time, not only currencies but also commodities entered in Forex platforms where they are traded as Forex products. Forex is the most liquid market of the world, with the highest volume of trade. The daily trade volume of Forex market is USD 5.5 trillion according to BIS (Bank of International Settlement) data. Forex market owes its huge popularity to the fact that such markets are available for trade with little amount of investments, with the involvement of the leverage factor. Although there are countries and organizations with a leverage ratio of 1:400—which can even be 1:1000 in some—in the world, success is impossible in this market with such high leverage ratios. Leverage ratios are capped by the legal limit determined by the Capital Markets Board (CMB) for every intermediary institution subject to CMB in Turkey. The maximum initial margin amount to be deposited is determined as TRY 50,000 with the Communiqué that entered into force on February 10, 2017. The maximum leverage ratio was revised as 1:10.
Although they share a number of similarities with equities and futures markets in terms of many features, Forex markets additionally have relatively different and unusual features. In organized markets:
- The buyer and seller do not know each other.
- Trade procedures are standard. Trade hours, trade size, order types, leverages, initial margins, maintenance margins and settlement conditions are governed by these procedures.
- The buyer and seller are matched in the stock exchange.
- A settlement institution acts as a seller for the buyer, as buyer for the seller.
- The parties do not necessarily need to trust each other.
In over-the-counter markets:
- The buyer and seller know each other.
- Parties determine the trade procedures to follow.
- There are not any standards for trade.
- Mutual trust is essential.
- Settlement transactions are performed by the parties.
Features of Forex, which is basically the main product of over-the-counter markets:
- It is pivotal in over-the-counter markets.
- The investor must trust the intermediary institution.
- Transaction fees are determined by the intermediary institution.
- The intermediary institution maintains registration of transactions performed.
- All the trade procedures are determined by the intermediary institution.
HOW ARE THE PRICES DETERMINED IN FOREX MARKETS?
Each bank in the world has its own cash flow for each currency. Banks may experience a big inflow or outflow of foreign currency. Therefore, banks wish to sell the excess currencies across interbank markets and to buy other currencies they need in order to regulate their cash flow and meet their and their customers’ cash flow needs. Banks act as market makers for nearly all currency pairs and for spot commodities including gold and silver. These banks play a role when the Forex market rates are set. Rates are communicated to Forex intermediary institutions via networks from these international banks that set such rates. Examples for these channels include companies such as Reuters, Bloomberg, Currenex, Hotspot FX, Flextrade etc. On the other hand, Forex companies communicate the rate to the end user, i.e. The investor, by adding their own revenue (markup) to the rates coming from these networks.