Society of International Financial Telecommunications:
The foreign exchange market operates worldwide, that is, the reach of the foreign exchange market is global. The foreign exchange is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The trade happening in the forex markets across the globe currently exceeds $1.9 trillion/day (on average). The FEM is not a physical place; rather, it is an electronically linked network of big banks, dealers and foreign exchange brokers who are all the time bringing buyers and sellers together.
It is spread throughout the big and small financial centres in the world. The biggest FEM centre is London. The dealing in foreign exchange in these centres goes on round-the-clock through computers, telephones, telex, fax etc., there is a satellite- based communications network called Society of Worldwide International Financial Telecommunications (SWIFT). The FEM operates on a very narrow spreads between buying and selling prices. But since the volumes traded are very large, dealers in foreign exchange markets stand to make huge profits or losses.
The foreign exchange market has two parts: wholesale and retail. The retail market deals with exchange of bank notes, bank drafts, currency, and travellers' cheques between private customers, tourists and banks. The wholesale FEM includes the central bank, but is mainly composed of an inter-bank market in which major banks trade in currencies held in different currency-denominated bank accounts, that is, they transfer bank deposits from sellers' to buyers' accounts. A physical transfer of currency is not involved; rather, there is a bookkeeping entry among banks. The inter-bank market has two parts: direct and indirect. In the direct market, banks deal directly with each other. Banks quote buying and selling prices directly to each other and all participating banks are market makers. It is a decentralised market, characterised by double-auctions and open bids. The indirect part of the wholesale markets, banks put orders with brokers who try to match purchases and sales of different currencies. The brokers charge commission to both buyers and sellers of these currencies.
The currencies are traded on different types of markets and on different basis. There is the "spot" or cash market, where there is immediate exchange (it actually takes two days) and forward basis. Let us now understand some of the used terms, and the basis of these trades.