Foreign Exchange trading works on the premises of the
simultaneous buying of one currency and the
selling of the other. Together with its size the forex market is; harder
to manipulate due to its high liquidity, less uncertainty due to
micro moves from economic releases which also makes it harder to
gain an informational edge and unlike equities it has no upward bias
where buying and selling can offer a
profit.
Unlike the Futures and equities markets that trade on
centralized exchanges the FOREX market trades on OTC market. This
means that the market is made up of all the participants trading
amongst themselves. These participants are large institutional banks
like Deutsche Bank, UBS, Citi Bank, RBS and more. The advantage of
this is;
- Heavier competition and lower transaction costs can
lead to quality issues in price and execution and can vary from
each provider. Needless to say as the FOREX market is so liquid it
is not usually affected as there are always reference points for
the instrument. .
- The providers are less regulated to price and
execution can become subject to fraud.
- As there is no central exchange counterparty (the
provider) rick can occur, meaning the firm cannot complete the
transaction. This can be seen as a small risk as most firms are
highly capitalized.
