Retail foreign exchange trading is a small segment of the larger foreign exchange market where individuals speculate on the exchange rate between different currencies. This segment has developed with the advent of dedicated electronic trading platforms and the internet, which allows individuals to access the global currency markets. In 2016, it was reported that retail foreign exchange trading represented 5.5% of the whole foreign exchange market ($282 billion in daily trading turnover).
Prior to the development of forex trading platforms in the late 90s, forex trading was restricted to large financial institutions. It was the development of the internet, trading software, and forex brokers allowing trading on margin, that started the growth of retail trading. Today, traders are able to trade spot currencies with market makers on margin. This means they need to put down only a small percentage of the trade size and can buy and sell currencies in seconds.
The year 1996 saw the first generation of forex online trading platforms. As a result, foreign exchange and customers’ markets flourished. Web-technology not only allowed retail foreign exchange trading to foster easy and fast ways for customers to access the markets, but also currency pairs while making trades from their own computers.
The software development of trading platforms has seen a number of stages. Initially, trading platforms were based on basic programs downloaded to computers, such as the popular MetaTrader 4. This was followed by the development of easier-to-use interfaces and advanced features such as charting and technical analysis tools. The next stage saw the move to web-based platforms and mobile devices such as tablets and smartphones. Since 2010 there has also been a focus on developments to integrate automated trading tools and social trading into the forex trading platforms.
Retail forex trading has been promoted by some as an easy way to make profits and has thus been the focus for a number of foreign exchange frauds. In response, financial regulators in a number of countries have introduced restrictions or provided warnings about this type of trading as well as legal actions against perpetrators. However, due to the decentralized nature of currency trading and the easy global access to the internet, a number of brokers are based in less restrictive jurisdictions.
- ^Triennial Central Bank Survey (April 2016), Bank for International Settlements
- ^Waters, Betsy (August 14, 2008). “The Rise of Retail Foreign Exchange”. TradingMarkets.com. The Connors Group, Inc. Retrieved 14 June 2013.
- ^Karmin, Craig (2008-01-12). “How a Money Trader went Bad; Bets on Currency Prices Become ‘Fraud du Jour’ Amid Regulatory Holes”. The Wall Street Journal. Dow Jones and Company. p. B1. Retrieved 2008-01-12.
- ^“COMMODITY SOFTWARE VENDOR CHARGED WITH VIOLATING CFTC ORDER”. CTFC.gov. Retrieved 13 December 2013.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.