The spot market accounts for nearly a third of global foreign exchange turnover. It can be broadly divided into two tiers:
Every foreign exchange transaction is an exchange between a pair of currencies. Each currency is denoted by a unique three-character International Standardization Organization (ISO) code (e.g. GBP represents sterling and USD the US dollar). Currency pairings are expressed as two ISO codes separated by a division symbol (e.g. GBP/USD), the first representing the “base currency” and the other the “secondary currency”.
The rate of exchange is simply the price of one currency in terms of another. For example GBP/USD = 1.5545 denotes that one unit of sterling (the base currency) can be exchanged for 1.5545 USD (the secondary currency). The base currency is the one that you are buying or selling. This elementary point is often lost on beginners. Exchange rates are usually written to four decimal places, with the exception of Japanese yen, which is written to two decimal places. The rate to two (out of four) decimal places is known as the “big figure” while the third and fourth decimal places together measure the “points” or “pips”. For instance, in GBP/USD = 1.5545 the “big figure” is 1.55 while the 45 (i.e. the third and fourth decimal places) represents the points.
- The interbank market where currency is bought and sold for delivery and settlement within two days, with the banks acting as “wholesalers” or “market makers”.
- The retail market made up of private traders, who deal over the telephone or the Internet through intermediaries (brokers).
Every foreign exchange transaction is an exchange between a pair of currencies. Each currency is denoted by a unique three-character International Standardization Organization (ISO) code (e.g. GBP represents sterling and USD the US dollar). Currency pairings are expressed as two ISO codes separated by a division symbol (e.g. GBP/USD), the first representing the “base currency” and the other the “secondary currency”.
The rate of exchange is simply the price of one currency in terms of another. For example GBP/USD = 1.5545 denotes that one unit of sterling (the base currency) can be exchanged for 1.5545 USD (the secondary currency). The base currency is the one that you are buying or selling. This elementary point is often lost on beginners. Exchange rates are usually written to four decimal places, with the exception of Japanese yen, which is written to two decimal places. The rate to two (out of four) decimal places is known as the “big figure” while the third and fourth decimal places together measure the “points” or “pips”. For instance, in GBP/USD = 1.5545 the “big figure” is 1.55 while the 45 (i.e. the third and fourth decimal places) represents the points.