The foreign exchange market is one of the largest in the world and studies suggest that a volume of $6.6trn is pushed through it every single day. One of the main users of the foreign exchange market is the institutional investor, which is usually a body like a bank looking to protect its clients against currency market upswings and downswings.
Until relatively recently, retail investors in the foreign exchange market were marginalised. But now, that’s all changed. The internet has fuelled what can only be described as a retail forex boom, and it’s now the case that traders from across the world can access foreign exchange trading in a short space of time and without any particularly onerous processes. But what exact role has the internet played in this regard? This article will find out.
What is retail forex?
First of all, it’s a good idea to clarify exactly what retail forex trading is, and how the term is commonly understood. In the financial sector, the term “retail” refers to the portion of the market which contains private individuals. An example of a retail investor would be a person who opens an account with a broker in order to select investment products for their children’s college fund. It can be contrasted with the term “institutional”, which refers to an investor that is an organisation. A pension fund, which is managed by individuals but exists as a corporate body, is a good example of this.
To a certain extent, the internet has democratised access to retail foreign exchange trading. As with all asset classes, trading used to require the intervention of a human broker, who would make the purchases on the customer’s behalf according to some sort of pre-arranged set of rules. Now that the word “broker” has come to also mean a self-service, dashboard-led website which the trader can use like they might drive a car, the need for that expertise has been cut out.
This has its downsides, of course. It might mean that traders are a little more susceptible to make uninformed decisions. It can also mean that the risk of fraud is higher: not all brokers are scrupulous, and without the presence of an experienced and regulated intermediary, things can quickly become problematic. An expert-led forex trading website like AskTraders can help defend against this, though. And on the whole, it has meant that the internet has been able to play a really important role in ensuring that everybody who has a basic amount of capital for foreign exchange trading can do so if they so wish.
Role of derivatives
The existence of the internet has also meant that new sub-markets under the foreign exchange market umbrella have been springing up. The main one is the derivative markets. Derivatives are financial instruments which “derive” their value from the underlying asset they track, rather than actually giving any ownership to those who buy them. This allows the trader to benefit from market movements without facing barriers to entry.
In the case of forex, for example, this might mean that the trader buys up derivatives of the GBP/USD pair. They would not, in that case, own any British pounds; instead, they would own a contract with the broker which dictates what happens to their investment if the “real” GBP/USD market goes up or down. The difference is subtle, but crucial.
It means that a whole generation of retail forex traders to make (or, indeed, lose) money on forex trading without having to actually purchase any currency. This makes it easier for the trader, as it means they can simply set up an account with a derivatives broker and instantly trade as much as they like without having to source a currency seller. And it also reduces the pressure on forex market liquidity by taking out a chunk of demand that might otherwise have been directed towards purchasing the real thing.
In sum, the internet has had a truly transformative effect on the world of retail forex. Something that was once largely just the preserve of those with access to institutional capital is now opened up to everyone who has even just a basic amount to invest. And thanks to the presence of self-service brokers and the rise of derivative financial products, retail forex trading is now arguably easier than ever to participate in – and a more dynamic market than it has ever been before.