How are currency prices determined? How can I trade a currency I don't already have?

how are currency prices determined unlike equities which are traded on a centralized exchange so you've got the London Stock Exchange for English equities you've got the New York Stock Exchange and maybe some other exchanges secondary exchangers there is no centralized exchange for currencies so it's literally I pick up the phone to another broker so you still have voice dealers to this day sitting a bunch of bank Barclays etc you pick up the phone and you say I want to buy a billion dollars worth of Euro against dollars and they'll make you a price now if

it's a bilateral transaction which all these if FX transactions are how do you know that that guy's not cooking the book so he's giving you a favorable price well so we live in the 21st century we have electronic markets so you and every other time are plugged into every other price maker so if that guy's giving you a price that's lower than over here you can immediately enter transaction and art and make a risk-free profit so ultimately the fact that you have people engaged in this kind of high frequency low latency arbitrage between various venues

ensures two things that you have sufficient liquidity to transact but more importantly that all the different participants all the different brokers are kept kosher so you know I kept in check and they're not gonna make you prices that are exorbitant ly out of whack so it's interesting because other than this arbitrage mechanism there's no real mechanism that'll ensure that you're getting a fair deal from the broker on the other side because of this this kind of bilateral exchange so you've been quoted as saying Forex is the flow of cash between countries is that still true

yes and going back to what we said about globalization in terms of flow a classic example as you know China up to now has been the choice or the port of choice for production certainly Southeast Asia bigger picture now and these people you know when you go on the street there you're not gonna see people using dollars they use Chinese want renminbi so you have to exchange that so yes currency transactions are growing as globalization is going can I trade in a currency I don't already have yes you can and we said going back to

what this trading ultimately mean by looking at the number on the screen and then it just goes up and down so the classic example you're here in England and you have pounds but you'd like to trade let's say the dollar versus the South African Rand which is also known as the Tsar so dollars are so you would like to do that because you have a particular outlook that South Africa is disintegrating to a certain extent and maybe they can produce as much goal they have infrastructure issues so therefore the source should go down and dollars

are should go to the ceiling so you have neither of those currencies at your disposal but you can still on your brokerage account buy one cell you either sell the other buy the other now how does that actually work behind the scenes especially when you value your P&L will happen is that the broker takes your pounds converts it to dollars to give you the Dass because you bought dollars in exchange you sell him the Czar which you have to borrow from somewhere and so what then happens is dollars arm moves around you close the position

out and because it's quittez dollars are your P&L actually ends up being in South African rent but you are a sterling holder so then the brook will convert those czar back into pounds now this would usually is what happens on the international interbank market what happens with retail brokers they tend to wrap it more CFDs and from their perspective it's really I think just a calculation the computer going through the numbers and then just taking pounds out of your account and putting pounds back and without any physical transaction necessarily happening you