FOREX KNOWLEDGE

What is a forex dealer?

A forex dealer provides online trading services to allow individuals to speculate on rapidly changing foreign exchange rates. Forex Dealer Members (FDMs) are regulated by the CFTC and National Futures Association in the United States, as well as by national and local regulatory bodies where they conduct business, and are held to stringent business and ethical standards.




How does forex trading work?

Many U.S. and international companies provide online trading software and services for individuals (traders) who want to speculate on the exchange rate differences between two currencies. In doing so, these speculators buy or sell currencies with the objective of making a profit when the value of the currencies changes in their favor, whether those fluctuations derive from market news, supply and demand principles, or geo-political events taking place throughout the world. In addition, the forex market is available to trade 24 hours a day, 5.5 days a week, allowing traders more freedom to trade when they want to, not just when an exchange is open.



Popularity of forex trading

The growth of trading OTC foreign exchange (known as retail FX or retail forex trading) has more than doubled from 2004 to 2007. Many financial experts suggest this growth curve is projected to continue well beyond 2010. What has led to this phenomenal growth? Innovation, competition and consumer demand.

The public has recognized U.S. forex companies as leaders in technology, with three of the leading forex firms named to the Deloitte Technology Fast 500[1], a highly regarded ranking of the top North American technology companies, for three consecutive years. The leading U.S. forex companies have also been named to the Inc. 500 list of the country’s fastest growing companies. In 2006, the top FX companies made up nearly 20 percent of the total number of financial services industry firms on the Inc. 500 list[2]. It is apparent that Americans have embraced this growing market, making foreign exchange one of the fastest growing industries in the United States.




A legacy of innovation and entrepreneurship

In the late 1990s, a group of American entrepreneurs saw the future of trading. Over-the-counter (or “off exchange”) foreign exchange trading was generating significant profits for large banks and corporations and, likewise, it lured individual traders who were increasingly becoming interested in participating in this large, but seemingly closed, market.

However, individuals with relatively small capital and no access to proprietary bank-to-bank computer systems were only able to trade currencies as futures through two exchanges. There was no method for traders to participate in the over-the-counter (OTC) forex market. The rapid pace of the currency market made it very difficult to trade on exchange, as most exchanges still traded currencies in the pit – an age-old system requiring multiple interactions to place a single trade. In addition, there were only a handful of currency markets available to trade, with inconsistent pricing and trading volumes. The pricing spreads fluctuated to widen significantly during times of increased market volatility, and market liquidity was not sufficient for overnight trading.

Meanwhile, Internet technologies were making rapid advances, and small upstarts recognized that these new technologies could solve the service delays and other problems faced when trading currencies with exchanges. These entrepreneurs became forex dealers who saw the Internet as an ideal avenue to provide customers with what they needed – instant and efficient access to the rapidly moving currency markets.




Creating and sustaining American jobs

The global forex industry has boosted the national economy by training and employing a domestic workforce of thousands. In a global marketplace where Americans struggle to compete for high-tech jobs, American forex dealers lead the world in this fast-growing industry, outpacing other firms based in Europe, Japan and Australia. The American firms are regarded as the leaders in the industry, hiring highly-coveted, knowledge-based workers who contribute to the economy’s bottom line.

Since 2001, FXDC members have added an estimated 1,500 employees to their companies in the United States alone. The size of the industry in the United States is estimated to be more than $8.7 trillion.[3]

Forex dealers have built workplace environments and cultures that rival – or even outshine – many traditional big name companies. Many of the jobs are high-end service jobs that rely on knowledge-based employees trained on complex financial transactions and skills that allow U.S. companies to compete and lead in the global financial arena.

Forex dealers primarily rely on customers outside of the United States, with upward of 70 percent of all customers coming from more than 140 countries. International customers must go through a stringent account-opening process, which includes depositing money in U.S. banks. These international deposits mean that tens of millions of dollars are flowing to the U.S. banking industry each day. In fact, it is estimated that the banks of forex dealers held $1.3 billion n customer deposits in 2007 alone.




Government and self-regulation

For many years, the foreign exchange industry was unregulated in the United States. Regulation was long overdue, especially in light of the fact that foreign exchange trading had been regulated in such locales as Hong Kong and London for over a decade. Some rules were formally put in place when the President signed and Congress passed the Commodities Futures Modernization Act[4] in December of 2000, which regulated the retail foreign exchange industry for the first time.

In the U.S., forex firms [5]are members of the CFTC [6]and the self-regulating National Futures Association (NFA) [[7]], operating under the same guidelines set forth for FCMs in the futures brokerage business. As part of a global financial community, leading forex dealing firms [8][9][10][11]are also regulated in multiple countries within five continents. Each firm welcomes regulation and adheres to strict global and local guidelines and net capital requirements to ensure that all business operations meet necessary rules and regulations. Other developed countries have effectively regulated the OTC foreign exchange market, and each member believes that the U.S. can do this as well.

On a regular basis, all forex dealers submit financial reports to its regulators and are subject to lengthy regulatory audits covering everything from marketing practices to employee training regimens. In addition, many of these long-established regulatory bodies extend specific regulations solely to retail forex dealers[12], such as higher capital requirements[13], disclosure statements and the requirement that all dealers disclose to customers that their funds may not be safe in the event of bankruptcy.




Worldwide leaders in technology

In a country built on opportunity and competition, the retail forex market has thrived since its inception. Entrepreneurs that began this industry have continued to push each other and push the envelope, expanding their reach to more than 140 countries to compete and excel in the global marketplace. This very competition has benefited individuals in service and value as market technology rapidly evolves to provide traders with the latest equipment and tools for online trading.

What’s more is that the leading forex companies have become global leaders; the dominant players in the forex market are based in the United States. Forex firms in other countries strive to adopt the technologies and practices of the U.S. firms, emulating the American firms’ business models in hopes of duplicating their success abroad. These American companies took the age-old process of on-exchange trading and shaped it into something new. The fast-paced nature of the industry has led to rapid innovations in technology; customers can now monitor and trade the markets 24 hours a day while placing orders almost instantly with sophisticated desktop trading software, from any computer via a web browser, or even from their mobile phones.




Acceptance among investors

The retail forex trading community provides a service that the global banking community cannot. Since forex dealers were originally intended to serve individual traders, they can provide around-the-clock service while managing risk to give customers consistent pricing and market liquidity, 24 hours a day. This is something that even the largest banks cannot provide 24 hours a day: to constantly deliver competitive prices day or night to individual traders.

Thanks to a thriving capitalist society, the early innovators were able to make the American dream a reality for themselves and their customers. These small startups have evolved into major global financial institutions, yet their commitment to innovation and customer service allows everyday citizens to access the world’s prime market, all because of the emergence of online technologies and the determination of a few dedicated leaders.