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14 Jun 2013

The Rise in Retail Forex

The foreign exchange market, also known as forex or FX, is the market of currency exchange linking buyers and sellers around the world.  Forex is the largest and most liquid market in the world, operating 24 hours a day, five and a half days a week.  Previously the sole domain of banks, hedge funds, and other large players, the forex market now includes a large and growing contingent of retail forex participants.

The foreign exchange market includes average daily transactions of roughly US$5 trillion.  This makes forex the largest market in the world by far, and also the most liquid and international in scope.  While the retail arm of the forex giant is difficult to define and measure, estimates range from 5 to 10 percent of the overall currency market.  While this number might seem insignificant, it continues to grow each and every day.

The forex market includes futures traded on an exchange and exchange traded funds, however, over 90 percent of volume takes place over-the-counter (OTC), meaning no exchange is involved.  The decentralised nature of the market makes it easier for individuals to get started in the retail trading game, with a number of providers connecting people around the world directly with the market.  While forex used to be the domain of large financial institutions and super-wealthy individuals, people can now get involved with as little as a few hundred dollars in capital.

The Bretton Woods Agreement allowed a number of currencies to fluctuate within a range of 1 percent after World War II, enabling the foreign exchange market we know today.  However, it was in the early 1970s when nations and banks stopped controlling foreign exchange and started completely floating currencies in a way characteristic of the current global market.  While individual traders did not get involved right away, the rise of retail brokers and the birth of the Internet created the conditions necessary for retail trading to grow and prosper. 

The Commodities Futures Trade Commission (CFTC) passed the Commodity Exchange Act and the Commodity Futures Modernization Act in the 1990s, opening the doors for online forex brokers and enabling anyone with access to the Internet to get involved in the biggest market in the world.  Hundreds of retail brokers have popped up since this time, from large industry leaders such as FXCM through to smaller niche and national operators.

While the retail arm of the forex market has enjoyed massive growth over its relatively short life span, declining volatility and increasing market regulation have led to reduced growth in some countries over the last couple of years.   According to Richard Repetto, principal of investment banking and brokerage firm Sandler & O'Neill, retail currency trading is "still growing, but probably growing more in Asia and outside of the United States."

The foreign exchange market in Australia and New Zealand has experienced tremendous growth in the last few years, due to the popularity of trading the Aussie and Kiwi, access to the fast-growing Asian market, and trader-friendly regulations.  According to a recent survey by trading technology vendor Integral, emerging forex markets like Australia and New Zealand are expected to rise in coming years, with private investors and traders increasingly attracted by the opportunities of currency exchange.