What makes the Foreign Currency Exchange Market Unique?

Sep 12 • Currency Exchange • 1696 Views • Comments Off on What makes the Foreign Currency Exchange Market Unique?

It is quite ironic that the foreign currency exchange market which is the biggest and most liquid financial market is largely self regulated without an officially recognized international authority to regulate the industry.

In the U.S., prior to the Dodd-Frank Regulations, it was only the National Futures Authority, a private, members only association of securities and commodities brokers which regulates the activities of its members but membership to the NFA was voluntary and online forex brokers are not in any way obligated to join.

Prior to the Dood-Frank Regulations about foreign currency exchange, every broker-to-broker and broker-to-client relationship has been built on trust, with every foreign currency transaction covered by an unshakeable gentleman’s agreement between banks, brokers, financial institutions, and their clients up until the foreign currency exchange market opened its doors to individual retail forex investors.

For a long while, the retail forex industry seemed to enjoy smooth sailing with self imposed market mechanisms in place to make the market more efficient and to ensure every contract is fulfilled. The retail forex industry thrived on the same trust and confidence that bound every broker, bank, financial institution, and everyone else involved with foreign currency exchange.

Everything was smooth and trouble free until the seemingly smooth and solid transactional relationship among the forex market participants was spoiled by the entry of unscrupulous brokers and dealers out to rob individual retail forex traders of their hard earned capital. They continue to exist up to this day and their nefarious activities continue to milk unsuspecting clients dry.


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The growing number of Americans losing their shirts to these unscrupulous brokers prompted the creation of the Dood-Frank Regulations which took effect in October 2010. The regulations required all brokers offering their services on American soil to be registered with the CFTC. The regulatory measures included minimum capital requirements and regular record keeping and reporting requirements. While the Dood-Frank Regulations may be a laudable step to protect the interest of individual retail forex traders against illegitimate forex brokers, it may also drive the retail forex business away from American soil since there are no restrictions for American citizens to deal with overseas clients.

The foreign currency exchange market has long existed and grew by leaps and bounds in the past decades with the participants bound only by unwritten agreement among gentlemen and the trust and confidence that has been built among the participants. There is no question about the efficiency of the forex market itself and the various market mechanisms in place that ensures all and every forex transaction that passes through the system is secured and guaranteed.

The only seemingly unavoidable problem is when illegitimate forex brokers rear their ugly heads here or there every now and then. While it is impossible to prevent their entry, the best solution is to throw the problem into the laps of individual retail forex traders. They can actually save themselves from falling prey to unscrupulous forex brokers by doing due diligence before they finalize their ties with any broker.

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