Who are the forex brokers?

Posted by samuelperth on March 16th, 2013

Forex brokers stand at the core of a foreign exchange market that had its foundation established in 1944, when the 44 members of the Allied Nations signed the Bretton Woods Accord, aiming for world stability. Later, the Accord mandated the emergence of the International Monetary Fund, soon to become the World Bank. Since the United States were the greatest power at the time, the US dollar became the backbone of the exchange system, obliging the world’s greatest banks to trade on it in order to keep their currencies from fluctuating.

Every beginning trader should have an idea about the considerable differences between the forex market and the rest of the financial markets out there. First of all, the FX market is the only market geographically decentralized. Of course, the world’s major cities tend to be at the center of certain trading clusters, since trades take the course of the nearest liquidity center in order to increase the speed of execution. This difference of a millisecond can be for various high risk traders a matter of profit or loss. Secondly, currencies are not traded on one centralized currency, but over-the-counter, with transactions taking place between two parties, either an individual and a bank, two individuals or two banks, with the mediation of a forex broker or dealer.

The task of the top forex broker is to amalgamate quotes from numerous sources with the purpose of establishing and combining the best bid, or the price required to sell a certain currency, with the best ask, or the price for buying a currency, and present the spread, or the result, to his customers. The forex market is organized into different tiers, depending on size. The top tire is the interbank or interdealer market, with a direct trade taking place between the forex-broker dealer and other major liquidity providers. The bottom tire is represented by retail trading, and as forex becomes more and more mainstream, retail forex brokers become increasingly sophisticated, expanding their operations as to offer more transparency, currencies, lower spreads and better coverage for traders.

Most interdealer trading takes place through electronic portals, also known as Electronic Communication Networks or ECNs, which are paid annual subscription fees by forex brokers and banks and in return are responsible for providing access to data price. The platform provider is of prime importance when choosing a top forex broker, since the possible collapse of one during high exchange times can lead you to instantaneous disaster. Also, at a customer’s requirement, a top forex broker can facilitate, both electronically and manually, a different type of trading such as that taking place by telephone means, an execution that carries the benefit of anonymity important to some fund managers.

After the financial crisis, the retail trading side of the forex market was especially in need of regulation. The Dodd-Frank Consumer Protection Act of 2010 was created to solve some of the issues emerged due to the regional fragmentation and the wide range of financial instruments that are controlled by different government bureaus. Today’s market official regulator is The Commodity Futures Trading Commission (CFTC) which now requires all forex firms to register with National Futures Association (NFA) either as retail foreign exchange dealers (RFEDs) or as futures commission merchants (FCMs). This is extremely important for anyone that wishes to become a trader because it means that forex brokers are now required to publish on a quarterly basis the percentage of accounts that have realized profit, an indicator of their performance.

Having a general knowledge about where the market comes from and what makes it work is an aid to anyone planning to become a trader and on the lookout for a forex broker. Since forex brokers are an essential part of the trading process, a thorough search must be conducted before choosing one.