Main FX trades (apart for FX swap market) are executed electronically.
FX Electronic networks offer automated matching and traders enter buy and sell orders directly into their terminals on an anonymous basis.
FX quotes are visible to all market participants 24 hours a day.
Spot Market Quotes: base currency and counter currency
The general practice in the FX market is to quote foreign currencies (including the US dollar) against the pound sterling, in terms of currency unit per £1.00 and foreign currencies (excluding the euro and the pound sterling) against the US dollar, in terms of currency unit per $1.00.
For example, if the euro/dollar exchange rate is 1.40, it means that one euro can be exchanged for 1.40 US dollar.
If the dollar/yen exchange rate is 89, it means that one US dollar can be exchanged for 89 Japanese yen.
The first currency that is quoted in a currency pair (for example, US dollar for dollar/yen exchange rate) is kown as the base currency and the second ( for example, yen for dollar/yen exchange rate) is known as the counter currency.
When the euro was launched in 1999, the European Central Bank (ECB) stipulated that the euro must be a base currency.
The US dollar can be either a base or a counter currency, on the contrary British pound, Australian and New Zealand dollar are typically base currency.
American Terms and European Terms: direct and indirect quotes
A direct exchange rate quote gives the home currency price of a certain quantity of the foreign currency quoted: usually 100 units, buy only 1 unit in the case of US dollar or British pound.
US dollar rate per unit of foreign currency: for example, $0,0112359 / yen.
This is a direct quote in the United States and an indirect quote outside US.
Foreign currency units per dollar: for example yen 89.00 / $. This is a direct quote outside US and an indirect quote in North America.
A growing percentage of currency trades do not involve the US dollar. For example, Swiss banks may quote the euro against the franc, whilst German banks may quote pound sterling in terms of euros.
FX traders are constantly on alert to the possibility of taking an advantage of exchange rates discrepancies through currency arbitrage transactions.
These deals involve buying a currency in one market and selling it in another, taking under controlimplied cross currency rates.
Currency arbitrages tend to smooth or to eliminate currency discrepancies and so to keep exchange rate uniform in the various FX markets.
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