Things You Always Wanted to Know About Retail Forex

Question One:

“The currency markets are huge! Is there a never-ending supply of liquidity, running down through Manhattan through data pipes and into my computer?”

The answer is yes and no.

Yes, the currency market is huge. There are estimates that say that billions — or even trillions of dollars in notional value are traded every day in the currency markets. Are you part of that market? The answer might surprise you (read onward!).

It’s important to realize that although the “worldwide currency market” is trillions of dollars of Super Large Trading Enormity, you are not, as a retail currency trader, participating directly in that Super Large Enormous Market. When we place a trade through a retail forex dealer, that forex dealer is doing either one of two things: they are passing the trade directly on to another entity that acts as a counterparty to your dealer’s trade (what is commonly called “Straight Through Processing”), or they are “warehousing” your trade, which means that they are keeping your trade on the books and then hedging against that trade by making their own trades with a larger bank.

What I am saying is that:

1. You are still speculating in foreign currency;

2. But you are not trading directly into the worldwide huge massive Over The Counter market — you are not trading directly with a bank, you are trading with a Forex Dealer who is ultimately laying off their risk with a bank or financial firm.

Ok — let’s get on with the second part of the question. Is there a never-ending supply of liquidity in this market?

Or, more specifically, shouldn’t I be able to get a trade executed at any price, and any trade size, any time that I want? The answer is that there are “more liquid” times in the market; for example, during the hours of the New York and European mornings, there is generally more trading volume (and liquidity) than during the Asian session.

Sometimes this means that at certain times of the day, there just aren’t as many banks or trading partners that want to actually do business in the currency markets, and this can make it more difficult to get an order filled (and during these times you might see your order rejected more often).

Question Two:

When does the currency market open on Sunday/Monday?

There is not one specific time that the currency market is “open” on Sunday (U.S./Europe). Remember, that there is no “bell” that rings and starts trading off around the world. Your dealer (including IBFX) might offer wider spreads on Sunday because not as many banks are trading, or because those banks themselves are offering only wider spreads.

Your dealer might not open for trading on Sunday afternoon until the banks that they trade with (to pass on your trades, or offset risk) are providing enough liquidity.

For these reasons, there is quite a bit of variation in when retail dealers open for trading on Sunday, and what the spreads look like when they do open. IBFX opens for trading on Sunday at 6:00 PM Eastern US Time.

Question Three:

Why are spreads going wacky? Why are swap rates changing?

Recently there has been a massive amount of market volatility. Banks who trade with your dealer have most likely been setting new policies on trades held overnight, on swap rates paid, on order execution, spreads, and much else.

You are seeing the consequences of these changes: volatile movement, huge gaps on Sunday evenings at times, and spreads widening from time to time.

Question Four:

Is there a central exchange in forex?

No. This is why there can be differences in pricing between two separate retail forex dealers.

Question Five:

Are swap rates universal?

No. Each retail forex dealer can set whatever swap rates they choose, and can base those rates on what the banks are charging/paying — or on the cycles of the moon, or any other reason.

Note: “swap rates” refer to the charges assessed to, or the payments made to, your account, when you hold overnight positions in a currency pair. We can do deeper into this issue in a future newsletter.

Question Six:

What would you look for in a forex dealer?

First, I’d say I want to do business with a transparent company, that publicly and openly talks about their business model and has a stable balance sheet (plenty of excess net capital, which is capital over and above what regulators require the firm to have, for those of you who read the CTFC reports).

Second, I’d want to do business with a dealer that does not trade against me. Third, I’d want to work with a company that has the very best customer service.

Brought to you by Alan’s Forex Blog:

http://alansforexblog.com