The illusion of forex market turnover

Jan 19, 2024

The brokers have created a soothing and delightful picture of the forex market. They say its turnover is $7.5 trillion per day. They make it believe that this market is just there, people and businesses are just exchanging currencies in their every day life and they have no clue that they could exploit this market, it's like an untouched treasure, and just imagine if you could extract just 0.000001% of that, it would be 75k in a day! Wow, anyone can do it, right?

Well, you have to understand that your forex trading business at the broker has nothing to do with what's going on out there in the world. Let me give you a couple examples of how the foreign exchange works.

1. A tourist from Europe lands at the airport in Australia. He goes to the exchange booth, gives 500 euros to the teller and receives 820 Aussie dollars.

2. A company in the USA receives an invoice from a European supplier and the amount to pay is 1,000,000 euros. They login to their bank account and make an international transfer. Their bank deducts 1,090,000 US dollars from their account.

In both of these examples, foreign exchange happened. Both of these transactions are added to the daily FX turnover of $7.5 trillion per day.

Now what makes you think that by clicking buy/sell at your broker's platform you can rob these people? Even if you could, that would be considered as theft and you would get into trouble for that. Imagine that the European supplier received just 900K instead of 1M for some weird unexplained reason (i.e. because of you). This wouldn't go unnoticed and the deal would break.

Understand that these transactions did not happen through your broker. So how can your broker pay you from that elusive $7.5 trillion per day market? They can't! Something is fishy here, isn't it?

Well, the thing is that there's no such thing as the global FX market. The total turnover is just a sum of individual transactions that happened, but it's not the market's turnover per se. All of the FX transactions are happening at individual sandboxes. You've probably heard that FX market is decentralised over-the-counter kind of market, so that's the meaning behind it!

The tourist who is exchanging money at the airport is doing that in the sandbox of foreign exchange booth. The money that the booth receives doesn't go to any global FX market, it just stays there. And they're the ones who set exchange quotes.

Same thing with the company who wants to pay the supplier in another continent. Their FX transaction is happening in the sandbox of that bank. The bank is free to set their own quotes.

Likewise, your trades at your broker stay in the sandbox of that broker. And it's the broker that provides you with the quotes. So you can only make as much as your broker is willing to pay to you! You can't just magically extract something from that imaginary $7.5 trillion FX market. Besides, when you click 'buy' at your broker, you're not buying an actual currency. You buy CFD (contract for differences). So your transaction is not even included in the global FX market turnover, unless you're a really successful trader and your broker has to go out there and buy actual currency to hedge against the risk that you posed to them.

Now this doesn't mean that all of those sandboxes are isolated. No, there are connections between certain sandboxes around the world, which makes FX a truly global thing, but there's no centralised market in FX through which all of that $7.5 trillion per day flows.

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