Going through the Babypips course and am at the CFD section learning about what’s actually happening in Spot Forex and it got me to thinking.
They say about 6 trillion dollars a day exchanges hands in the Forex market, but since in Spot Forex no currency is actually changing hands, only a contract for the difference between those currencies (CFD), does the Spot Forex market count towards that 6 trillion figure?
Honestly it’s just a curiosity. Spot would count for so little compared to the big money changing hands in the interbank pools that it would be a drop in the sea, but was still wondering anyway.
“Because retail traders can’t access nor trade the spot FX market, this is the only way that we’re able to speculate on just the prices of currency pairs (or “trade the forex market”).”
So this further confuses the arbitrary question. I suppose perhaps the Spot Forex would count towards true volume, but retailer trading wouldn’t.
Retail forex trading volume is tiny compared to the overall FX market.
According to the Triennial Central Bank Survey, retail foreign exchange trading represents 5.5% of the whole foreign exchange market ($282 billion in daily trading turnover).
A lot of retail trades are offset or “internalized” so most of this volume doesn’t even make it “outside” to be hedged by external LPs.
This is a complex topic. I can’t say for sure when it comes to Forex CFDs, but for stocks the broker basically has two options. One is to offset a trade with another trade in the opposite direction, and two is to actually make a trade in the underlying, physical instrument, or options. This is simplified, as you also have the A-book, B-book and even C-book element. Not going into this now, but a C-book customer generally is a customer who usually loses on trades, so brokers don’t bother hedging those trades. Google it for more. Seeing as there are no actual brokers involved with retail FX trading, I assume the big banks have advanced hedging methods in play on a larger scale.
This is one reason why the FOREX currency exchange market is such a complex market. The facts that the spot forex market doesn’t use a central exchange and so many other currencies transactions happening every day for thousands of different random reasons. And so many silly retail traders think a moving average or stochastic oscillator will help them earn money. So crazy!