Why does the forex market close at the weekend
Although one of the common perceptions about the forex market is that it never closes, it is very difficult, at least in theory, to find traders who work on a Sunday. The novice trader will also find that trading activity has ground to a halt as forex brokers took their platforms offline over the weekend. However, things are a bit different, as we will explain in the next few lines.
There are no weekends for forex traders
Important participants in the foreign exchange market
In one of our previous articles (Who Trades Forex?), we mentioned that the main purpose of currency exchange is to facilitate trading and travel operations. We also found that institutional investors contribute about 93% of the total trading volume. That means that out of a total of $7.5 trillion worth of transactions per day, individual forex traders account for no more than $500 billion of that huge number. These figures are also one of the main reasons why the forex market is closed for the weekend.
Why do forex brokers prefer not to offer trading on weekends
With the exception of the Middle East region, financial institutions are closed on weekends almost everywhere in the world. At the very least, most banks’ dealing desks are closed these days, meaning some $4.7 trillion of usual liquidity in the forex market will not be available over the weekends. Therefore, even if a retail forex broker wants to allow trading through its platform, it will face two major problems. The first problem is that he has to act as a market maker with no hedging options as the main counterparties (big banks and financial institutions) will not be available during this period. The second problem is that the brokerage firm cannot offer reasonable spreads due to lack of liquidity. The size of the spread is inversely proportional to the available liquidity (the spread narrows as the main players in the market compete for trades sent by the broker’s clients).
Therefore, the broker is forced to increase the spread significantly to compensate for the lack of liquidity, reduce risk and act as the counterparty of the trade (OANDA previously imposed a spread of up to 20 points when it provided its clients with the Possibility to trade during the weekend before this service is later discontinued). Of course, this huge rise in the spread will dampen traders’ appetite for action over the weekend. In addition, the brokerage firm incurs additional infrastructure costs (e.g. electricity, communications, etc.) if its systems remain operational over the weekends. Ultimately, the brokerage firm will not generate a profitable return by providing trading services on weekends. Also, don’t forget that the market often opens with a price gap, which also results in huge losses for the brokerage firm. In other words, the weak yield, which does not justify the risk, is the main reason that has caused almost all brokerage houses to take a break on Saturday and Sunday.
Is there another way to trade on the weekend
In theory, any wealthy investor who can execute large trading volumes can negotiate with their broker to place trades at the end of the week. But even if this opportunity is there, trading during this time is not a wise decision due to the tight liquidity and high spreads.
Downtime also allows Forex brokers to perform maintenance on their systems (e.g. InstaForex traders will find that the company always disconnects from its platform for around 2 hours past midnight on Saturday GMT). In addition, professional traders who can predict the trend with a high degree of accuracy do not need to place their trades on the weekends, as they find it better to wait until the Monday session opens to get a clearer understanding of the situation on the market. For starters, the weekend is an opportunity to take a break, evaluate performance, and refine strategy so they start in a better mood when the market opens on Monday.
Businesses that exchange goods and services across borders need to convert foreign currencies to ensure smooth export and import traffic. In addition, these companies resort to participating in the foreign exchange market to reduce the risks of exchange rate fluctuations through hedging transactions. Large corporations routinely execute billions of dollars worth of contracts to meet their business needs and reduce financial risk.
Where do foreign exchange rates come from
Stocks are traded on centralized exchanges, providing a transparent price discovery mechanism. Stock traders from all over the world enter the buy and sell prices, after which the bid prices are arranged in descending order and the ask prices are listed in ascending order in the order book. The trade is executed when the bid price matches the ask price, ultimately leading to the discovery of a fair stock price. However, a novice forex trader may wonder where the exchange rates come from, especially since the forex market is a decentralized exchange that operates outside of the official booth. In this guide we will try to explain the source of the price flow offered by Forex brokers.