Forex Vs. Other Markets

Contrarily to options, stocks, or futures, currency trading does not happen on a regulated exchange. Also, any governmental body won’t be able to control this. Also, there are no clearing houses to guarantee trades, and there is no arbitration panel to adjudicate disputes. Each member trade with each other based on credit agreements. More importantly, business in the largest, most liquid market around the world depends on nothing more than a metaphorical handshake.

At first, this ad-hoc arrangement is bewildering to investors who are familiar with structured exchanges like the New York Stock Exchange (NYSE) or the Chicago Mercantile Exchange (CME). But this arrangement works in practice. Self-regulation gives effective control in the market because participants in FX need to compete and cooperate at the same time. In addition to that, well-known retail FX dealers in the United States become members of the National Futures Association (NFA). And by doing this, FX dealers agree to bind arbitration if there is any dispute. Thus, all retail customers contemplating trading currencies must go so only through an NFA member firm.

How Does it Differ?

Moreover, the FX market varies from other markets in its own unique ways. Traders who believe that the EUR/USD might spiral downward can short the pair at will. And there is no uptick rule in FX as there is in stocks. Also, there are no limits on the size of the position – as there are in futures. Therefore, a trader, in theory, could sell as high as $100 billion worth of currency if they have adequate capital.

On the other hand, a trader is free to move on the information in a way that would be considered insider trading in traditional markets. For instance, a trader got an information form a client who happens to know the governor of the Bank of Japan (BOJ) that the BOJ plans to increase rates at its next meeting. Here, the trader is free to purchase as much yen as they can. Now, there is no such thing as insider trading in FX – European economic data, like German employment figures, are typically leaked days before the official release.

Before leaving with the impression that FX is the Wild West of finance, remember that this is the most liquid and fluid market around the world. It trades non-stop, 24 hours a day. And it seldom has any gaps in price. Its sheer size and scope – Asia to Europe to North America – build the currency market as the most accessible in the globe.