Spot FX

The spot FX market is an “off-exchange” market, also known as an over-the-counter (“OTC”) market.

The off-exchange forex market is a large, growing, and liquid financial market that operates 24 hours a day.

It is not a market in the traditional sense because there is no central trading location or “exchange”.

In an OTC market, a customer trades directly with a counterparty.

Unlike currency futures, ETFs, and (most) currency options, which are traded through centralized markets, spot FX are over-the-counter contracts (private agreements between two parties).

Most of the trading is conducted through electronic trading networks (or telephone).

The primary market for FX is the “interdealer” market where FX dealers trade with each other. A dealer is a financial intermediary that stands ready to buy or sell currencies at any time with its clients.

The interdealer market is also known as the “interbank” market due to the dominance of banks as FX dealers.

The interdealer market is only accessible to institutions that trade in large quantities and have a very high net worth.

This includes banks, insurance companies, pension funds, large corporations, and other large financial institutions manage the risks associated with fluctuations in currency rates.

In the spot FX market, an institutional trader is buying and selling an agreement or contract to make or take delivery of a currency.

A spot FX transaction is a bilateral (“between two parties”) agreement to physically exchange one currency against another currency.

This agreement is a contract. This means this spot contract is a binding obligation to buy or sell a certain amount of foreign currency at a price that is the “spot exchange rate” or the current exchange rate.

So if you buy EUR/USD on the spot market, you are trading a contract that specifies that you will receive a specific amount of euros in exchange for U.S dollars at an agreed-upon price (or exchange rate).It’s important to point out that you are NOT trading the underlying currencies themselves, but a contract involving the underlying currencies.

Even though it’s called  “spot”, transactions aren’t exactly settled “on the spot”.

In reality, while a spot FX trade is done at the current market rate, the actual transaction is not settled until two business days after the trade date.

This is known as T+2 (“Today plus 2 business days”).

It means that delivery of what you buy or sell should be done within two working days and is referred to as the value date or delivery date.

For example, an institution buys EUR/USD in the spot FX market.

The trade opened and closed on Monday has a value date on Wednesday. This means that it’ll receive euros on Wednesday.

Not all currencies settle T+2 though. For example, USD/CAD, USD/TRY, USD/RUB and USD/PHP value date is T+1, meaning one business day going forward from today (T).

Trading in the actual spot forex market is NOT where retail traders trade though.