How does the FX market operate? An article to understand the world's largest financial market

You may have heard the term “foreign exchange,” but you might not fully understand it. In simple terms, FX (foreign exchange) is the process of exchanging one currency for another. If you’ve ever traveled abroad, you’ve probably participated in foreign exchange transactions—just without realizing it.

Viewing Foreign Exchange in Daily Life

Imagine this scenario: Xiao Wang is traveling from Taiwan to the United States on a business trip. He walks into the currency exchange counter at the airport, ready to convert New Taiwan Dollars into US Dollars. The teller tells him that the current exchange rate is 1 New Taiwan Dollar = 0.034 USD. Xiao Wang exchanges 10,000 New Taiwan Dollars for 3,400 USD.

In this process, Xiao Wang has actually made a foreign exchange transaction—he sold New Taiwan Dollars and bought US Dollars. This is the most straightforward reflection of the FX market.

What Is the Foreign Exchange Market?

The foreign exchange market is a global, decentralized trading market where currencies are exchanged. There is no fixed location or central exchange; instead, trading occurs through a network of banks, brokers, and traders.

Exchange rates are constantly changing, and the market is continuously evolving. But what’s really interesting is that most trading in the FX market is not related to international trade or tourism. Instead, the vast majority of currency transactions come from trader speculation—they buy a currency expecting to sell it later at a higher price to make a profit.

How Big Is the Foreign Exchange Market?

To understand the scale of the FX market, let’s compare it. The New York Stock Exchange (NYSE) has a daily trading volume of about $200 billion. And the FX market? Its daily trading volume reaches $6.6 trillion (according to the Bank for International Settlements 2019 triennial report), which is 33 times that of the NYSE.

However, this $6.6 trillion encompasses the entire global foreign exchange ecosystem. In reality, the spot market (the part most traders participate in) has a daily trading volume of about $2 trillion. Narrowing it further to retail investors (like us), the trading volume accounts for only about 3-5% of the total—roughly $200-300 billion per day.

What does this tell us? Although the FX market is enormous, there is still ample liquidity and participation space for retail traders.

The FX Market Never Closes

Another unique advantage of the FX market is its 24-hour operation. Unlike stock or bond markets, the FX market is open nearly 24 hours a day, 5 days a week (closed only on weekends).

How does it work? The answer is simple—trading flows between different financial centers around the world. When Auckland and Wellington in New Zealand wake up and start trading, the baton is passed to Sydney, then Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally New York. When traders in New York finish their day, trading shifts back to New Zealand.

This global relay ensures that the FX market is always in motion, allowing investors to find trading opportunities in any time zone. Unlike traditional stock markets that close after hours, the continuous operation of the FX market provides a flexible trading window for global participants.

Why Is the FX Market So Important?

Understanding how the FX market operates is crucial for investors who want to participate in the global financial system. Whether you’re looking to hedge currency risk or seek trading opportunities, knowing the scale of the FX market, its participants, and its 24-hour nature can help you make more informed decisions.