The role of the traditional forex broker has changed considerably over the course of the last four decades, with this now performed almost exclusively online and increasingly reliant on modern technology.
In many ways, this has been a fortunate development, particularly as the forex market now sees in excess of $5 trillion traded every single day. By transitioning online, brokerage firms have also made forex trading more accessible to a global audience, creating a cycle of sustainable and exponential growth over time.
In this post, we’ll break down the core responsibilities of a forex broker, while asking how such entities are regulated in alternative jurisdictions across the globe.
What is a Forex Broker? A Brief Introduction
In simple terms, a brokerage site such as Oanda is an independent entity that connects retail foreign exchange traders directly with the forex market.
In this respect, it facilitates and oversees all trades executed by investors, with the forex market itself traded on the so-called ‘interbank’. This refers to the fact that participating banks trade electronically with one another at variable price points during each 24-hour period.
In terms of facilitating trades, a forex broker offers a clear and concise way for you to purchase a chosen currency pair and hold onto this for as long as necessary. More specifically, it has helped to introduce the concept of margin to the mainstream market, allowing traders to open relatively large positions with a minimal deposit and leveraged capital.
Brokers then make their profit by taking a fixed slice of the pie when you make your trades, with this usually set in competitive percentage terms.
Overall, this negated the historic need for forex traders to have huge sums of money or at least an existing relationship with a national bank, which once left the market at the mercy of professional and institutional investors.
In more recent times, the role of brokers has also evolved and broadened considerably, with firms now helping to inform trades directly by providing users with access to a comprehensive suite of analytical tools and various risk management measures.
What are the Legal Requirements of Brokers?
As a newcomer to the forex market, it’s also imperative that you understand the full legal requirements of brokers and what to look for in a potential service provider.
To begin with, all forex brokers must be fully licensed and regulated by the Financial Conduct Authority (FCA), which has statutory powers thanks to the Financial Services and Markets Act of 2000. As a result, the FCA is able to operate a register that includes all authorised brokerage firms, helping you to distinguish between established and rogue traders.
Not only must each forex broker hold a valid license in the UK, but they must also accept (and publish the results of) periodic audits of its operations and financials.
Perhaps most importantly, the current regulations dictate that a broker must hold enough funds to cover its clients investments at any given time, as otherwise traders run the risk of losing some or all of their capital in the event of the broker going bust.