I keep reading hints in various places that traders aren’t actually trading spot forex, but some type of futures contract or derivative. In the UK, I believe they trade a Contract for difference. What exactly are we trading in the U.S.?
Yes, in the U.S., we are trading [B]spot forex[/B] — not to be confused with foreign exchange derivatives, contracts for difference, or spread betting.
Spot forex is a unique sort of spot contract — read about it here — 301 Moved Permanently
spread betting is in trading with a Market Maker, which doesn’t have to be bad if they are honest. In spot the trades or at least some are sent to the market, either via STP or ECN
Interesting topic. The US also has access to Forex brokers, therefore they do trade spot forex
I opened an account with FXCM yesterday and began trading. :35: I noticed in their fine print it says:
THE FOREIGN CURRENCY TRADING YOU ARE ENTERING INTO IS NOT CONDUCTED ON AN EXCHANGE.
Do actual currency exchanges exist somewhere in the world? Where do the big institutional investors trade? For example, if the Bank of Japan wants to weaken the yen by selling a lot of it, where does the BOJ carry out those transactions?
In many countries of the world, there are exchanges on which currency futures and options are traded.
But, spot forex is not traded on those exchanges.
Spot forex is defined as off-exchange, over-the-counter trading in a specific type of currency contract. So, by definition, spot forex trading cannot take place on an exchange.
The specific type of currency contract referred to here is a “rolling” spot contract, with an initial 2-day settlement date, which is rolled forward by one day, every day. For more about these spot forex contracts, check out this post — http://forums.babypips.com/newbie-island/67020-we-really-trading-spot-forex.html#post638836
Here’s an article from EarnForex.com which compares currency futures and options trading on exchanges versus spot forex trading over the counter through forex brokers —
Currency Futures Exchanges vs. Spot Forex Trading
There is an institutional spot forex market which is traded through institutional forex brokers. Many institutions conduct business on these venues.
There are some forex brokers who are institutional brokers only, and there are some which offer both retail and institutional trading. Your broker, FXCM, offers both.
The largest institutions (including central banks) trade directly with the world’s top investment banks (CitiGroup, Deutsche Bank, etc.) in what we call the interbank network.
This is the top of the currency-trading food-chain. And this is where the BOJ would go to manipulate the value of the Japanese currency — by, let’s say, dumping a ton of yen on the market to knock down the price of the yen versus other currencies.