The foreign exchange is the largest financial market in the work with an average turnover each day of approximately $5 trillion. There are a lot of different entities who are able to trade on the forex market. The open access to the forex market is one of the reasons why it is important to regulate the market. You should consider all of the reasons why the foreign exchange should be regulated.
Foreign Exchange Speculation
There are two types of trades conducted on the forex market. The first is commercial transactions and the second is speculation. Of the two speculation makes up the majority of movements on the market. Commercial transactions are the payments made to a foreign currency. However, speculation is all other trades which are made to generate a profit from the market.
The high volume of speculation trades on the market lead to changes in the forex prices. There are certain traders that have more effect on the market than others. The banks, hedge funds and other large financial institutes drive most of the movement on the market. This has caused concern with certain people as they feel these entities are able to change the currency value as they see fit.
The Effect on Retail Traders
More and more people are looking to trade on the forex market. However, these retail traders are still at a disadvantage compared to the large trading entities. The purchase power of these traders is not as big as the large players. This means that trends can change based on what the large players do and there is nothing a retail trader can do but accept the loss. Many people believe that the playing field is also not as level as many believe. Large traders often have access to additional information and work on better rates than the retail trader.
The Foreign Exchange Regulations
While the forex market is largely unregulated certain countries have started to implement regulations. These regulations are generally focused on the brokerage firms within a country. In America the CFTC is the main regulatory body, Japan has the FSA while Europe and the UK are still largely unregulated.
The regulations in these countries often relate to the amount of leverage a broker can offer. Before regulations were implemented it was not uncommon to find brokers offering 400:1 leverage. Now, in countries with regulations brokers are only able to offer around 20:1 leverage. However, in the unregulated countries it is still possible to find 200:1 leverage.
Regulations have also started to crack down on fraudulent and scam brokers. This is one of the major problems facing retail traders as they have to use a broker to trade. The CFTC requires that all brokers in the USA register with them. These brokers then have to adhere to their regulations or they will not be able to conduct business.
The Institutional Regulations
There are also very limited regulations on the institutional forex trade. In most cases the local central bank will control the trade, but there are no global regulations. This can lead to higher hedging costs, big banks moving the market as they want and the possibly of triggering a recession.