The forex market is the largest financial market in the world, with an estimated daily turnover of around $5.3 trillion. Forex trading takes place in two primary markets, the over-the-counter (OTC) market and the exchange-traded market. In this article, we will discuss the percentage of forex trading that occurs in the OTC market.
What is the OTC market?
The OTC market is a decentralized market where financial instruments are traded directly between two parties, without the involvement of an exchange. In the forex market, the OTC market is where trades take place between banks, financial institutions, and speculators. The OTC market is also known as the interbank market.
What percentage of forex trading is OTC?
According to a survey conducted by the Bank for International Settlements (BIS), the OTC market accounts for 68% of the global forex market. The remaining 32% of forex trading takes place on exchanges. This means that the majority of forex trading takes place in the OTC market.
The OTC market is popular among investors and traders because it offers more flexibility and customization than exchange-traded markets. In the OTC market, traders can negotiate the terms of their transactions, such as the size of the trade, the price, and the settlement date. This allows traders to tailor their trades to their specific needs and trading strategies.
The OTC market is also more accessible than exchange-traded markets. In the OTC market, traders can enter and exit positions more quickly and easily than in exchange-traded markets. This is because the OTC market is open 24 hours a day, 5 days a week, and trades are conducted electronically. In contrast, exchange-traded markets have specific trading hours and require traders to go through a broker to execute their trades.
Why is the OTC market important?
The OTC market is important for several reasons. Firstly, it provides liquidity to the forex market. Banks and financial institutions use the OTC market to hedge their currency exposures and manage their risks. This creates a pool of liquidity that can be accessed by traders and investors.
Secondly, the OTC market is important for price discovery. The prices of currency pairs in the OTC market are determined by supply and demand. This means that the prices in the OTC market reflect the true market price of a currency pair. In contrast, exchange-traded markets may have price distortions due to the presence of market makers.
Thirdly, the OTC market is important for innovation. Financial institutions and traders can create new financial instruments and trading strategies in the OTC market. This allows the market to evolve and adapt to changing market conditions.
Conclusion
In conclusion, the OTC market accounts for 68% of the global forex market. The OTC market is popular among investors and traders because it offers more flexibility and customization than exchange-traded markets. The OTC market is important for providing liquidity, price discovery, and innovation to the forex market. As the largest financial market in the world, the forex market will continue to be a major player in the global economy.
