Overview of trading Forex online

How a Forex system operates in real time

Online foreign exchange trading occurs in real time. Exchange rates are

constantly changing, in intervals of seconds. Quotes are accurate for the time

they are displayed only. At any moment, a different rate may be quoted.

When a trader locks in a rate and executes a transaction, that transaction is

immediately processed; the trade has been executed.

Up-to-date exchange rates

As rates change so rapidly, any Forex software must display the most up-todate

rates. To accomplish this, the Forex software is continuously

communicating with a remote server that provides the most current exchange

rates. The rates quoted, unlike traditional bank exchange rates, are actual

tradable rates. A trader may choose to “lock in” to a rate (called the “freeze

rate”) only as long as it is displayed.

Trading online on Forex platforms

The internet revolution caused a major change in the way Forex trading is

conducted throughout the world.

Until the advent of the internet-Forex age at the end of the 1990’s, Forex

trading was conducted via phone orders (or fax, or in-person), posted to

brokers or banks. Most of the trading could be executed only during business

hours. The same was true for most activities related to Forex, such as making

the deposits necessary for trading, not to mention profit taking. The internet

has radically altered the Forex market, enabling around the clock trading and

conveniences such as the use of credit cards for fund deposits.

Forex on the internet: basic steps

In general, the individual Forex trader is required to fulfill two steps prior to

trading:

• Register at the trading platform

• Deposit funds to facilitate trading

Requirements vary with each trading platform, but these steps bear further

discussion:

Registering

Registration is done online by the individual trader. There are various forms

used in the industry. Some are quite simple, where others are longer and

more time-consuming. In part, this can be attributed to governmental or

other authorities’ requirements, though some Forex platforms require more

information than is actually needed. Some even require a face-to-face

meeting, or to obtain hard copies of required documents such as a passport,

or driver’s license.

The key requirements for registration are the trader’s full name, telephone,

e-mail address, residence, and sometimes also the trader’s yearly income or

capital (equity) and an ID number (passport / driver’s license / SSN / etc.).

Typically, the Forex platform is not required to run a thorough check, but rely

on the registrant to be truthful. Nevertheless, each Forex platform conducts

certain routines, in order to check and verify the authenticity of the details

provided.

Registrants are required to declare that funds used for trading are not in

question, and are not the result of any criminal act or money laundering

activity. This is mandatory as part of a global anti-money laundering effort

Questions and answers about market making

What is a market maker?

A market maker is the counterpart to the client. The Market Maker does not

operate as an intermediary or trustee. A Market Maker performs the hedging

of its clients' positions according to its policy, which includes offsetting

various clients' positions, and hedging via liquidity providers (banks) and its

equity capital, at its discretion.

Who are the market makers in the Forex industry?

Banks, for example, or trading platforms (such as Easy-Forex™), who buy and

sell financial instruments “make the market”. That is contrary to

intermediaries, which represent clients, basing their income on commission.

Do market makers go against a client's position?

By definition, a market maker is the counterpart to all its clients' positions,

and always offers a two-sided quote (two rates: BUY and SELL). Therefore,

there is nothing personal between the market maker and the customer.

Generally, market makers regard all of the positions of their clients as a

whole. They offset between clients' opposite positions, and hedge their net

exposure according to their risk management policies and the guidelines of

regulatory authorities.

Do market makers and clients have a conflict of interest?

Market makers are not intermediaries, portfolio managers, or advisors, who

represent customers (while earning commission). Instead, they buy and sell

currencies to the customer, in this case the trader. By definition, the market

maker always provides a two-sided quote (the sell and the buy price), and

thus is indifferent in regards to the intention of the trader. Banks do that, as

do merchants in the markets, who both buy from, and sell to, their

Can a market maker influence market prices against a client’s position?

Definitely not, because the Forex market is the nearest thing to a “perfect

market” (as defined by economic theory) in which no single participant is

powerful enough to push prices in a specific direction. This is the biggest

market in the world today, with daily volumes reaching 3 trillion dollars. No

market maker is in a position to effectively manipulate the market.

What is the main source of earnings for Forex market makers?

The major source of earnings for market makers is the spread between the bid

and the ask prices. Easy-Forex™ Trading Platform, for instance, maintains

neutrality regarding the direction of any or all deals made by its traders; it

earns its income from the spread.

How do market makers manage their exposure?

The way most market makers hedge their exposure is to hedge in bulk. They

aggregate all client positions and pass some, or all, of their net risk to their

liquidity providers. Easy-Forex™, for example, hedges its exposure in this

fashion, in accordance with its risk management policy and legal

requirements.

For liquidity, Easy-Forex™ works in cooperation with world's leading banks

providing liquidity to the Forex industry: UBS (Switzerland) and RBS (Royal

Bank of Scotland).