FOREIGN EXCHANGE SERVICE

In finance, a foreign exchange service provides clients with an on-line platform to trade currency, such as the U.S Dollar and the Euro. Clients may hedge against, or more likely speculate upon, changes in the exchange rate for different currencies.

The small "retail traders" who are likely to use these services are often the target of forex scams. The U.S. Commodity Futures Trading Commission, which loosely regulates many foreign exchange traders in the U.S., has warned of an increase in the number of these scams.

forex exchange regime

The exchange rate regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many of the same factors.

The basic types are a floating exchange rate, where the market dictates the movements of the exchange rate, a pegged float, where the central bank keeps the rate from deviating too far from a target band or value, and the pegged exchange rate, which ties the currency to another currency, mostly more widespread currencies such as the U.S. dollar or the euro.

Fixed rates are those that have direct convertibility towards another currency. In case of a separate currency, also known as a currency board arrangement, the domestic currency is backed one to one by foreign reserves.

Foreign Exchange Dealers Coalition (FXDC)

The Foreign Exchange Dealers Coalition (FXCD) is an alliance of the largest U.S. foreign exchange market dealers. It was created to pool together industry resources to create awareness and recognition that forex dealers are a powerful choice for individuals who choose to speculate in financial markets.

The FXDC partnership was formed in the fall of 2007 to demonstrate the viability of the forex industry and to ensure fair regulation and oversight that does not hamper freedom of choice, innovation or job creation.
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.
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.

FX OPTION

In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world. Most of the FX option volume is traded OTC but a fraction is traded on exchanges like the Philadelphia Stock Exchange, or the Chicago Mercantile Exchange for options on futures contracts.

For example a GBPUSD FX option might be specified by a contract allowing the owner to sell £1,000,000 and buy $2,000,000 on December 31. In this case the pre-agreed exchange rate, or strike price, is 2.0000 GBPUSD or 0.5000 USDGBP and the notional is £1,000,000. This type of contract is both a call on dollars and a put on sterling, and is often called a GBPUSD put by market participants. If the dollar is stronger than 2.0000 GBPUSD come December 31 (say at 1.9000 GBPUSD) then the option will be exercised, allowing the owner to sell GBP at 2.0000 and immediately buy it back in the spot market at 1.9000, making a profit of (2.0000 - 1.9000)*1,000,000 GBP = 100,000 USD in the process. If he immediately exchanges his profit, this amounts to 100,000/1.9000 = 52,631.58 GBP.

FOREX MARKET SPACE

FXMarketSpace is the first centrally-cleared, global foreign exchange (FX) trading platform for the over the counter (OTC) market. It was formed through a 50/50 joint venture between Reuters and the Chicago Mercantile Exchange to serve the evolving needs of the FX market, including speed, efficiency, centralized clearing and complete anonymity.

The joint venture was announced in May of 2006. On the 26th of March, 2007 the platform announced that it was fully operational and open for trading.

Initially the platform enables trading in Spot FX across six major currencies - the Euro, Japanese Yen, British Pound, Australian Dollar, Swiss Franc, and Canadian Dollar against the US Dollar, as well as four cross-currency pairs.

FOREX CAPITAL MARKET(FXCM)

Forex Capital Markets (FXCM) is the largest Forex Dealer Member(or financial services firm specializing in retail forex), supplying online trading services for retail speculators in the foreign exchange market. The company has 90,000 clients and over 400 institutional customers from more than 80 countries. Approximately 500 employees, based in offices in New York City, London, Dallas, San Francisco, Hong Kong, and Tokyo provide 24-hour, multi-lingual sales, dealing, administrative, and technical support 7 days a week.

Retail forex is controversial because the high degree of leverage available in the market leads most retail traders to lose money, and because of the existence of many forex scams. Quoted in the Wall Street Journal regarding retail forex, (Currency Markets Draw Speculation, Fraud July 26, 2005) "Even people running the trading shops warn clients against trying to time the market. 'If 15% of day traders are profitable,' says Drew Niv, chief executive of FXCM, 'I'd be surprised.' "

In November 2005, Forex Capital Markets (FXCM) became entrenched in the bankruptcy proceedings of Refco, Inc (OTC:RFXCQ). Refco, a big commodities brokerage that collapsed amid an accounting scandal, has been largely purchased by Man Group. At the time Refco owned a 35% share in FXCM. FXCM is currently backing a client-led lawsuit against REFCO.

FXCM is a registered Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association (NFA). Ownership and regulatory information on FXCM are available at its National Futures Association (NFA) listing.

Like most market makers, FXCM's revenues come from five main sources:

1. The Spread - The difference between the spread FXCM quotes to clients and the spread FXCM receives from the banks they offset from. If FXCM is unable to match a buyer and seller internally, FXCM will, after the positions become sufficiently large, offset with larger banks that quote them cheaper spreads.
2. Internal matching of client trades - If the spread is 3 pips, and FXCM is able to match a buyer and a seller internally, they collect 3 pips.
3. Interest on client deposits (like most online brokers, such as E*TRADE, these are a dependable and large source of income)
4. The firm's own speculative positions in the market.
5. Losses on clients' trades that were never offset.

Not all of the above apply to FXCM's "no-dealing-desk" trading option. In this set-up, trades are routed to other interbank market participants. FXCM then may not derive income from source two through five. This allows clients direct access to bank liquidity. However, all trades are still cleared through a dealing desk of some type as all banks have dealing desks.

FOREIGN EXCHANGE MARKET

The foreign exchange (currency or forex or FX) market exists wherever currency of one country is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is over US$ 3 trillion. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks, and are subject to forex scams.

Economic factors affecting forex market

These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.

Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).

Economic conditions include:

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.

Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.

Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency.

Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.

FOREIGN EXCHANGE RATES

In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 123 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 123 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 2 trillion USD worth of currency changes hands every day.

The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.

A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).

Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions.

The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a country's interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit).

In choosing what type of asset to hold, people are also concerned that the asset will retain its value in the future. Most people will not be interested in a currency if they think it will devalue. A currency will tend to lose value, relative to other currencies, if the country's level of inflation is relatively higher, if the country's level of output is expected to decline, or if a country is troubled by political uncertainty. For example, when Russian President Vladimir Putin dismissed his Government on February 24, 2004, the price of the ruble dropped. When China announced plans for its first manned space mission, synthetic futures on Chinese yuan jumped (since China's currency is officially pegged, synthetic markets have emerged that can behave as if the yuan were floating).

The foreign exchange markets are usually highly liquid as the world's main international banks provide a market around-the-clock. The Bank for International Settlements reported that global foreign exchange market turnover daily averages in April was $650 billion in 1998 (at constant exchange rates) and increased to $1.9 trillion in 2004 (Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity 2004 - Final Results). The biggest foreign exchange trading centre is London, followed by New York and Tokyo.

FOREIGN EXCHANGE RESERVES

Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits held by central banks and monetary authorities. However, the term foreign exchange reserves in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve position as this total figure is more readily available, however it is accurately deemed as official reserves or international reserves. These are assets of the central banks which are held in different reserve currencies such as the dollar, euro and yen, and which are used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.
Foreign exchange reserves are important indicators of ability to repay foreign debt and for currency defense, and are used to determine credit ratings of nations, however, other government funds that are counted as liquid assets that can be applied to liabilities in times of crisis include stabilization funds, otherwise known as Sovereign wealth funds. If those were included, Norway and Persian Gulf States would rank higher on these lists, and UAE's $1.3 trillion Abu Dhabi Investment Authority would be second after China. Singapore also has significant government funds including Temasek Holdings and GIC. India is also planning to create its own investment firm from its forex reserves.

RETAILL FOREX TRADING

Retail Forex Trading

As previously mentioned, currencies fluctuate relative to other currencies. Take two of the most common currency pairs, the EUR/USD (the price for Euros in US dollars) and the GBP/USD (the price for The Great British Pound in US dollars). If there is positive economic news in the Euro zone and negative economic news in the United Kingdom, it is very conceivable that the EUR/USD would go up in value, meaning it is now more expensive in US dollars to purchase one EUR, and that the GBP/USD would go down in value, meaning it is now cheaper to buy Great British Pounds with US dollars. In this scenario, the US dollar went up in value against one currency and down in relation to another. It is important to understand this idea that currency pairs move mostly independently from one another. Currency pairs with similar currencies on one side (like the USD in the previous example) can be similarly affected by news regarding the common currency, but the crucial concept is that they don’t have to be.

Retail Forex is usually highly leveraged

The idea of margin (leverage) and floating loss is another important trading concept and is perhaps best understood using an example. Most retail Forex market makers permit 100:1 leverage, but also, crucially, require you to have a certain amount of money in your account to protect against a critical loss point. For example, if a $100,000 position is held in Eur/USD on 100:1 leverage, the trader has to put up $1,000 to control the position. However, in the event of a declining value of your positions, Forex market makers, mindful of the fast nature of Forex price swings and the amplifying effect of leverage, typically do not allow their traders to go negative and make up the difference at a later date. In order to make sure the trader does not lose more money than is held in the account, Forex market makers typically employ automatic systems to close out positions when clients run out of margin (the amount of money in their account not tied to a position). If the trader has $2,000 in his account, and he is buying a $100,000 lot of EUR/USD, he has $1,000 of his $2,000 tied up in margin, with $1,000 left to allow his position to fluctuate downward without being closed out.

Typically a trader's trading platform will show him three important numbers associated with his account: his balance, his equity, and his margin remaining. If trader X has two positions: $100,000 long (buy) in EUR/USD, and $100,000 short (sell) in GBP/USD, and he has $10,000 in his account, his positions would look as follows: Because of the 100:1 leverage, it took him $1,000 to control each position. This means that he has used up $2,000 in his margin, out of a $10,000 account, and thus he has $8,000 of margin still available. With this margin, he can either take more positions or keep the margin relatively high to allow his current positions to be maintained in the event of downturns. If the client chooses to open a new position of $100,000, this will again take another $1,000 of his margin, leaving $7,000. He will have used up $3,000 in margin among the three positions. The other way margin will decrease is if the positions he currently has open lose money. If his 3 positions of $100,000 decrease by $5,000 in value (not at all an unusual swing), he now has, of his original $7,000 in margin, only $2,000 left. As discussed above, if you have a $10,000 account and only open one $100,000 position, this has committed only $1,000 of your money plus you must maintain $1,000 in margin. While this leaves $9,000 free in your account, it is possible to lose almost all of it if the position dives. On the other hand, if you have 5 positions open in a $10,000 account, you can lose only $5,000 because the other $5,000 is held in margin. However, this does not make it safer to hold more positions. The Forex market fluctuates so rapidly, that with shallow margins, you are much more likely to be closed out of your position and lose it entirely when it might have recovered from a temporary fluctuation if you had had sufficient margin to cover the variation. The more positions open at one time, the more risk the trader is exposed to.

Transaction costs and market makers

Market makers are well compensated for allowing retail clients to enter the Forex market. They take part or all of the spread in all currency pairs traded. In a common example, EUR/USD, the spread is typically 3 pips (3/100 of a percent). Thus prices are quoted with both a Buy and Sell price (e.g., Buy Eur/USD 1.2000, Sell Eur/USD 1.2003). That difference of 3 pips is the spread and can amount to a significant amount of money. (Note: the spread is only taken out at the beginning of the trade; this transaction cost is subtracted only upon entering the trade, not leaving it) Because the typical standard lot is 100,000 units of the base currency, those 3 pips on EUR/USD translate to $30 paid by the client to the market maker. However, a pip is not always $10. A pip is 1/100th of a percent, and the currency pairs are always purchased by buying 100,000 of the base currency, which is also known as the counter currency. For the pair EUR/USD, the base currency is USD; thus, 1/100th of a percent on a pair with USD as the base currency will always have a pip of $10. If, on the other hand, your currency has Swiss Frank (CHF) as a base instead of USD, then 1/100th of a percent is now worth around $8, because you are buying 100,000 worth of Swiss Franks.

If a trader with a $10,000 account on 100:1 leverage felt, after reading reports on the economy, that the USD was going to go up in value against the EUR and the CHF, he would Sell EUR/USD (thus selling EUR and buying USD) and Buy USD/CHF (buying USD and selling CHF). The transaction is all electronic, so the trader doesn’t need to have Euros in his account. On a large scale, the market maker can sell Euros on behalf of the trader, knowing that the position will eventually be closed and converted back to USD. Assume that the client sold 100,000 EUR/USD at 1.2000 and bought 100,000 USD/CHF at 1.2500. Seconds after this transaction, his account would read: Balance: $10,000, Equity $9,946. The loss of $54 is due to the transaction cost taken only at the entry of a position of 3 pips, which translates to $30 for the EUR/USD pair and $24 for the USD/CHF pair. With equity of $9,946 on 100:1 leverage with 2 positions opened, $2,000 is now held in margin, leaving the trader $7,946 in usable margin. Suppose the EUR/USD (sold at 1.2003) starts to move against the trader and goes up in value to 1.2013, while the USD/CHF (bought at 1.2500) starts moving for the client and also goes up in value to 1.2515. His account information will have changed but his balance and margin will remain unchanged at $10,000 and $2,000 respectively. His equity and his usable margin, however, will change to reflect the new market conditions. While for the trader, the platform will calculate this all automatically, it is important to see it step by step.

FOREX TRADER'S RIGHTS

The Forex Trader’s Bill of Rights (2005) is a non-fiction book about the foreign currency trading market, published by OANDA_Corporation. It is primarily a call to arms for currency traders to call for greater transparency and accountability within the market. The overleaf provided with the printed version of the book states: “Big banks and confederated brokerages have overcomplicated forex: trading costs are inflated, unnecessary risk abounds, and the system is grossly unfair.” Essentially, the book elaborates on this premise, detailing ways in which traders are being unfairly treated and encouraging them to take action.

OANDA is a company that provides currency trading tools for investors, travelers, and businesses. As such, there is an unavoidable marketing aspect to this publication. However, OANDA is not mentioned throughout the book. There has been a clear effort to maintain a relatively neutral point of view. The back cover does state “OANDA is a leading provider of online currency trading…FXTrade…enables all currency investors to change the way forex trading is done”.

The authors believe currency investors have 10 basic rights which are being violated: each short chapter deals with one of these rights. They are:
1. The right to immediate, uncensored access to the marketplace
2. The right to trade real spot
3. The right to know
4. The right to trade whenever you want
5. The right to equal treatment
6. The right to choose and manage risk
7. The right to understand cost
8. The right to learn – on your own, or through free exchange with other traders
9. The right to full disclosure
10. The right to pay and receive interest

1) The right to immediate, uncensored access to the marketplace Chapter one argues that when trading traditionally (with banks etc.,) execution and price are affected by who you are (size of your order/ relationship with your market maker etc.), the amount of greed on the part of the market maker, and manual intervention which can delay the trade. The chapter calls for transparency, fairness, and efficiency for traders from market makers.

2) The right to trade real spot
Chapter two addresses unnecessary delays in settlement of trades, which according to the authors increase risk for investors.

3) The right to know
The third chapter states that market makers share information based on who you are: in some cases they share information that should not be shared; in other cases they do not share information that should be publicly available. This leads to an unfair advantage.

4) The right to trade whenever you want
The chapter asserts that market makers may advertise 24 hour trading but they close the books on Friday. However, world events which affect currency price occur on weekends. The argument continues that since the technology for 24/7 trading is available, it should be offered by all market makers.

5) The right to equal treatment
Chapter five argues that every trader should be given the same price and spread, and that market makers should not discriminate between traders.

6) The right to choose and manage risk
Traders are encouraged to use a market maker who does not require high minimums, lets them trade any amount, and provides immediate settlement as a way of minimizing risk.

7) The right to understand cost
It is reasoned that traders have the right to understand spreads, as well as who gets a “cut” and why. This chapter also includes a profitability calculator.

8) The right to learn – on your own, or through free exchange with other traders
This chapter covers multiple ways to learn about trading, and test new strategies, including trading games offered by online market makers and other sources of Internet information.

9) The right to full disclosure
The book claims that a lack of transparency in pricing, execution, and after the trade needs to addressed. Market makers should publish statistics regarding real spreads and prices and traders should demand that they do this.

10) The right to pay and receive interest
It is argued that continuous interest should be introduced, which would make for price flows that are less volatile

ONLINE INVESTMENT

Investing online has become the norm for investors and traders over the past decade with many, if not all brokers now offering online services with unique trading platforms.

In the past, investors had to call up their brokers and place an order on the phone. The broker would then enter the order in their system which was linked to trading floors and exchanges.

With the advent of the internet, investors can now enter orders directly online, or even trade with other investors via ECN's (electronic communication networks). Some orders entered online are still routed through the broker allowing agents to approve or monitor the trades. This step assists in the protection of both the client and brokerage firm from unlawful or incorrect trades which could affect the client’s portfolio or the broker’s license.

Online brokers are most often referred to as discount brokers, due to their lower fees as opposed to full service brokers who also give advice to clients.

Before choosing to invest or trade online it is important for investors to research the online brokers that they plan to employ, assuring that they are licensed within their state or provincial jurisdiction. This step will help to protect investors from falling victim to unlawful or illegal securities schemes (Boiler Room).

Investors must also fully understand the potential risks of investing without the help of a trained Stock Broker or Investment Advisor. These professionals are experienced both in trade and education and forgoing their advice could be costly.

Once the above two steps are complete it is dually important to research the sector, business and financial statements of each company whose stock they plan to purchase. This, along with diversification and basic portfolio theory, will assist to mitigate some of the risks associated with the volatility in both the stocks and the stock markets.

Once investors have chosen the online brokerage that best suites their needs, they will be provided a trading platform. This platform acts as the hub, allowing investors to purchase and sell securities (fixed income and equities), options and forex. Included with the platform are tools to track and monitor securities, portfolios and indices, as well as research tools, real-time streaming quotes and up-to-date news releases; all of which are necessary to trade profitably.

Some of the popular online brokers include: Etrade, Scottrade, Ameritrade, and Fidelity. Commissions vary from broker to broker, depending on the services included with the account.

FOREX SCAM

A forex scam is any trading scheme used to defraud individual traders by convincing them that they can expect to gain an unreasonably high profit by trading in the foreign exchange market, which would be a zero-sum game were it not for the fact that there are brokerage commissions, which technically make forex a "negative-sum" game.

These scams might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits, improperly managed "managed accounts", false advertising, Ponzi schemes and outright fraud.It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment.

The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.

An official of the National Futures Association was quoted as saying, "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically..." Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $300 million, mostly in managed accounts. CNN also quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?"

The highly technical nature of retail forex industry, the OTC nature of the market, and the loose regulation of the market, leaves retail speculators vulnerable. Defrauded traders and regulatory authorities can find it very difficult to prove that market manipulation has occurred since there is no central currency market, but rather a number of more or less interconnected marketplaces provided by interbank market makers.

forex

Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25–50 billion daily, which is about 2% of the whole market and it has been reported by the CFTC website that unexperienced investors may become targets of forex scams.
Mini accounts are ideal for traders who have practiced trading with a demo account, and would like to gain more experience before opening a standard GFT trading account. Mini accounts allow traders to become more familiar and comfortable trading with GFT’s award-winning software, DealBook® 360, without risking large amounts of capital.Due to the smaller lot sizes, lower minimum account deposit requirements and the ability use higher leverage, mini accounts allow novice forex traders to develop trading strategies and build confidence in the market. With available leverage of up to 400:1, you can trade more efficiently by getting one of the highest leverage ratios in the forex market through GFT. Without appropriate use of risk management, a high degree of leverage can lead to large losses as well as gains. Accounts opened with minimum deposits will be liquidated should they fall below GFT minimum margin requirement