Foreign Exchange Market Structure, Players, and Evolution

Abstract

Exchange rates affect output and employment, inflation through the cost of imports and commodity prices and international capital flows through the risks and returns of different assets. This chapter describes the foreign exchange (FX) market and presents new evidence on recent trends, thereby setting the stage for the rest of the handbook. It presents stylized facts on the market’s size and composition. The chapter looks at the motives, incentives, and constraints of the major players and describes the momentous changes in trading practices and market structure that have taken place over the recent decades. It describes market transformation caused by the electronic trading revolution. To better understand FX activity on multibank trading systems and electronic brokers, the results of a survey of 15 institutional and retail platforms is presented. The chapter also examines the state of play in the global FX market, which reflects both stability and rapid technological change. Controlled Vocabulary Terms currency trading; electronic trading; foreign exchange markets; foreign exchange rate; multibank trading platforms; trading

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