Foreign Exchange Market Mechanism

The foreign exchange market is not a physical place; it is an informal, electronically linked network of big banks, foreign exchange brokers and dealers whose function is to bring buyers and sellers together. The foreign exchange market operates on very narrow spreads between buying and selling prices; they can be smaller then a tenth of a per cent of the value of currency traded, and they are about one-fiftieth or less of the spread faced on bank notes by international travelers. Yet, because the volumes of transactions involved are huge, traders in foreign exchange market stand to make huge profits or losses.