Online Forex brokers

The days when George Soros had to physically visit the bank in the Hungarian capital city of Budapest to execute foreign exchange transactions, carrying cash in large briefcases, are long gone.

With the phenomenon of globalization, and liberalisation of world trade ever since the US’ departure from the Bretton-Woods accord, all world currencies have become effectively free-floating. Governments compete against each other in devalueing their respective home currency, in an aim to tip the real-life trade balance in their favor … (while non-chalantly accepting, that foreign-bought goods become more expensive for their own citizens to buy as a result of such policies).

All this world trade involves currency transfers, and no bank in its right mind wants to hold on to foreign currency for any length of time. Foreign currency is truly a “hot potato” – banks try to clean it off their balance sheets as soon as feasibly possible.

These developments, accompanied with the proliferation of the internet – and the widespread deregulation of the financial industry – have given rise to a multitude of online Forex brokers. They are all too happy to take all that foreign currency off the banks’ hands, with these banks at the same time becoming the brokerage companies’  “liquidity provider”.

To make use of profit opportunities originating from constantly fluctuating foreign exchange rates (e.g. EUR/USD, or GBP/EUR, etc.), these brokers take out loans with their liquidity providers in order to leverage Foreign exchange transactions, at times 100-fold and higher. The interest rate opportunities for banks are much higher in that line of business, as they are in home mortgages or consumer loans. Banks makes huge profits nowadays in Forex trading, not by trading currencies, but by extending loans to Forex brokers.

The resulting system of potentially huge profit-generation, but also substantial trading risk, is made accessible to any Forex traders with money to deposit, and an available internet connection. The broker charges a fee for transactions, and, depending on the type of broker (ECN or Market Maker), may marginally share in the trader’s realized profits.

Posted in Financial Transactions in Forex Trading, Forex terminology.