|How Is Currency Trading Different?|
How Is Currency Trading Different?
Currency trading is different than trading stocks, futures or options in that currency trading is not done on a regulated exchange (for example: the NYSE). There is also no central governing body (such as the SEC), there is no clearing house to guarantee the trade and there is no arbitration panel to adjudicate disputes. Trading currency is done through credit agreements.
The currency market is self regulated and in practice seems to work well enough. Some forex dealers in the US have also become members of the National Futures Association (NFA) which will settle any dispute with binding arbitration. It is good advise that if someone is trading currency that they trade through a dealer that is a member of the NFA.
Where is the commission?
In the case of stock, option or futures traders typically use an agent (the broker) to execute the transaction as per the traders instructions. The broker then gets a commission whenever a trader buys/sells a tradable security.
In the case of forex trading the FX firm that the investor trades with is the broker. FX firms get paid through the bid-ask spread. Since the dealer is also the broker the dealers will assume market risk by being the counterparty to the trade.
Unlike other security markets, forex traders cannot buy on the bid and sell at the offer. Forex traders must wait until the price covers the spread, once this is done the amount above the spread is profit as there are no commission costs.