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When considering how currencies trade, it makes sense to look at both the participants and how trading in the various currencies has become compartmentalized in the forex market. Wholesale participants in the forex market exchange commonly-traded currencies with each other on a regular basis in which they simultaneously buy one currency and sell another.
They do these transactions in currency pairs which have differing degrees of liquidity that varies depending on the currencies involved. Liquidity can be defined as the ability to make a transaction without disturbing the price and at a minimal bid/ask spread.
Professional forex traders working at large commercial and investment banks typically provide foreign exchange rates to their forex trading customers and to other banks. Often these traders make two-way prices, specializing in just one major currency pair, and they can individually transact hundreds of millions of dollars per day.
Forex Market Segment Characteristics
Currencies often trade with different characteristics depending on whether they belong to the general forex market segments of the majors, the major crosses, the minors or the exotic currencies. These categories and their usual market-related characteristics are briefly described below:
- The Major Currencies: These currencies belong to those especially well-developed countries or trading blocs that are actively involved in international commerce and banking. The majors are all quoted against the U.S. Dollar, although in some currency pairs, like the Euro and Pound Sterling, the other currency is the base currency and the U.S. Dollar is the counter-currency. The majors generally trade on tight bid/offer spreads, and the high liquidity involved tends to provide the deepest and most reliable forex markets to trade in.
- The Major Crosses: Currency pairs that consist of the aforementioned major currencies, excluding the U.S. Dollar. These crosses often have their own specialist market-makers and so they generally trade on tight spreads with good liquidity.
- The Minor Currencies: These currencies tend to come from developed countries that are less significant as international trading partners. The minors can in turn be broken down into two main categories:
- The Commodity Currencies: Those currencies that tend to trade along with the prices of the main commodities that they export, &
- The Scandis: Those currencies that come from countries located in the Scandinavian region of Northern Europe.
- The Exotic Currencies: Most of the so-called exotic currencies belong to smaller and/or developing countries that form part of broader geographical regions which can be used to organize them. These exotics will usually be quoted with the U.S. Dollar being the base currency, and forex rates sometimes become unavailable during times of political and economic turmoil. Also, these currencies generally trade at substantially wider bid/ask spreads when compared to the spreads that prevail in the majors and minors.
The market in these minors tends to lack some of the liquidity enjoyed by the majors, but they still generally trade on reasonable bid/ask spreads and have decent liquidity under most market conditions.
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