Handbook of Exchange Rates

1.2 Geography and Composition of Currency Trading

Given the pervasive influence of exchange rates, it is no surprise that the dollar value of trading activity in spot and forward FX market dwarfs most other economic measures (BIS, 2010). With daily average turnover estimated at $2.0 trillion, the market is 36 times larger than the combined exports and imports for the world's 35 largest economies, 16 times their combined GDP, and roughly 10 times exchange-traded equity turnover.

FX trading volume has exploded reflecting an electronic revolution that has lowered trading costs, attracted new groups of market participants, and enabled aggressive new trading strategies. Between 1998 and 2010, turnover in the FX market grew by over 250% (BIS, 2010). The associated 8.4% average annual growth rate far exceeds the contemporary 5.5% annual expansion of global real GDP (Table 1.1).

Table 1.1 FX Turnover and Growth: Comparison with Trade, GDP, and Equity Trading Volume

Many aspects of the FX market remain constant despite the electronic revolution. As has been true for decades, the markets remain decentralized with high liquidity and continuous trading (Lyons, 2001; Rime, 2003; Osler, 2009). As ever, the trading day begins when dealers arrive for work in Australia and Asia. Activity then moves to Europe when markets open in Frankfurt, London, and Paris, and finishes late in the afternoon in ...