Lesson 4: How the Forex Broker Provides Access to Individual Traders
By: Informedtrades.com
Lesson 4: How the Forex Broker Provides Access to Individual Traders
In our last lesson we looked at the structure of the forex market and how the market has traditionally been a very country club type environment where the size and sophistication of the market participant determined the price they received. In today's lesson we are going to continue this discussion with a look at how the internet and the invention of online trading platforms has begun to level the playing field, giving the individual trader much greater access to reasonable pricing.
Before the internet, very few individuals traded foreign exchange as they could not get access to a level of pricing that would allow them a reasonable chance to profit after transaction costs. Shortly after the internet became mainstream however several firms built online trading platforms which gave the individual trader a much higher level access to the market. The internet introduced two main features into the equation which were not present before:
1. Streaming Quotes: The Internet allowed these firms to stream quotes directly to traders and then have them execute on those quotes from their computer instead of having to deal over the phone. This automated trade processing, and therefore made it easier for firms to offer the ability to trade fx to the individuals and still be profitable.
2. Automatic Margin Calls: What is not so obvious but what was perhaps even more key is that the internet allowed an automated margin call feature to be built into the platform. This allowed firms to accept cash deposits from clients instead of having to put them through the process of signing up to trade via a credit line. As we discussed in our last lesson it is very difficult to get a credit line to trade FX and for those who do it is a lot of paperwork and hoops to jump through before they can begin trading. This would have made it impossible to offer FX trading to smaller individual traders as the cost involved in getting them set up to trade would not be worth it.
As the electronic platform allowed clients to deposit funds and then automatically cut them out of positions if they got to low on funds, this negated the need for credit lines and made the work to get an individual account open well worth it to the forex broker from a profit standpoint.
If you don't understand all the ins and outs of margin at this point don't worry as this is something that we are going to go into much more detail on in a later lesson.
For now it is simply important to understand that what these firms did was take all the traders who were not big enough by themselves to get access to good pricing and routed their order flow through one entity that was. This allowed these firms access to much tighter pricing than would otherwise have been possible which was then passed along plus a little for the brokers to the end client.
So now you can see why although the forex market has been around for a relatively long period of time, individuals have only started to trade the market over the last few years.
Anther key thing that it is important to understand here is that the larger a firm gets in terms of trading volume, the greater access that firm has to tighter prices and liquidity and the more likely that firm is to be able to pass on better pricing and execution to their clients.
This is another reason that many traders will evaluate the size of a firm as one of the key factors in deciding who to trade with.
That's our lesson for today. In our next lesson we are going to look at the different categories of participants in the fx market so we hope to see you in that lesson.
Actionable trading levels delivered to YOUR charts in real-time.
Wed 30 Jan 2019 A 12:15 US- ADP Payrolls A 15:00 US- EIA Crude A 14:00 US- Fed Decision Thu 31 Jan 2019 A 07:00 DE- Retail Sales A 08:55 DE- Employment A 10:00 EZ- GDP A 10:00 EZ- Flash HICP A 12:30 US- Weekly Jobless A 15:00 US- Personal Income/PCE Fri 1 Fed 2019 A all day Flash PMIs AA 08:30 US- Employment A 10:00 EZ- GDP
Mon 4 Feb 2019 A 09:30 GB- Construction PMI Tue 5 Feb 2019 A all day Service PMIs A 04:30 AU- Reserve Bank Of Australia Wed 6 Feb 2019 A 16:00 US- EIA Crude Thu 7 Feb 2019 A 12:00 GB- BOE Decision A 13:30 US- Weekly Jobless Fri 8 Feb 2019 A 13:30 CA- Employment
Global-View Affiliate Program
We are starting an affiliate program to market some of our products.
Send me an email if you would be interested or if you know someone who would like to be an affiliate. Generous commissions payout for those accepted.
Put the word "affiliate" in the email subject line.
Veteran FX Trader, Max McKegg, forecasts all the Major currencies and the Australasians; providing Daily and Medium Term Trading forecasts to subscribers, who include large Banks the world over, as well as individual traders in more than 30 different countries.
Are you
looking for your first broker or do you need of a new one? There are
more critical things to consider than you might have thought.
We were trading long before there were online brokers. Global-View
has been directly involved with the industry since its infancy. We've
seen everything and are up-to-data with recent regulatory changes.
WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES
CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN
EXCHANGE AND DERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE
PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE
INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC
REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL
SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR
SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS.