The spot forex market is an over the counter market. The spot forex market is a decentralized network of buyers and sellers. There is no physical central exchange that acts as a central clearing house.
Over the counter means that the buyers and sellers make a binding contract with each other after agreeing on the price and this is not carried through an exchange unlike the forex futures trading that is carried out through the exchange like CBOT, CME etc.
There are several advantages of a central exchange like the counterparty risk for the trades is reduced. There is trading anonymity something that big players want to hide their trails. Forex traders in the spot forex market carry out their activities by dialing directly with one another or through brokers on telephone or internet.
For all the practical purposes, the spot forex market is unregulated and free of distorting red tape. The sheer size of the daily trading volume something like $3 trillions means that the government and the central banks interventions have little long term effect on prices. Chicago Mercantile Exchange (CME) along with Reuters launched the worlds first centrally cleared global forex market place in 2007; FXMarketSpace. CME will act as the clearing house and guarantee the performance of all the contracts for both buyers and sellers in this centrally cleared system.
However, only sophisticated investors with net worth of more than $20 Million can trade on the FXMarketSpace. Unfortunately FXMarketSpace is an institutional trading platform and is not open to retail forex traders. Forex market is an efficient market. The spot forex market has never been a value creator rather it is a vehicle for other transactions. For example, a US portfolio manager buying Japanese stocks or an Italian company buying raw material from Brazil are inadvertent parts of the forex market.
The spot forex market is still skewed against the retail forex trader. Recently NFA (National Futures Association) had also passed certain new rules that make it more skewed against the small investor like you and me. Why is it so?
With the advent of the internet, it became possible to introduce trading platforms for the retail investors. Previously spot forex trading was the playfield of the big banks, multinationals and the hedge funds.
The forex market differs from other traditional financial markets. Things deemed illegal in most of the other financial markets are simply considered part of the game in the forex market. Insider trading, front running, price shading etc are all regularly seen in forex trading and have no legal repercussions whatsoever. Retail spot forex is seeing a lot of growth in the recent years. A mushroom growth of online forex brokers took place. Many did not have even enough capital with them to start the brokerage business. Most of these forex brokers behave like bucket shops. But this is the way; the spot forex market has developed over the years.
Why these players trade forex? What type of advantages they have over the retail forex traders? It is essential for you that you understand the nature of the spot forex market and who are the main players. Off balance sheet earnings are the declared aim of most banks and spot dealing in forex which represents a high loss potential but practically no credit risk falls in that category.
Over the counter (OTC) means that the spot forex market is spread all over the globe with no central location! Over the counter nature (OTC) of the spot forex market means that currency transactions do not take place at any single place.
A players access to the spot forex market depends on the quantity of transactions of large amounts of money. Players in the spot forex market range from those who trade billions of dollars daily to those who only trade just a few thousand dollars daily. Now who are the main players in the forex market against whom you as a retail forex trader will be competing?
Author Resource:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Develop Your Own Forex Trading System !
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