The Birth of the Retail Foreign Exchange Market
The foreign exchange market is the single largest marketplace in the world. This is quite a surprise to many traders, as many casual stock market investors have never even heard of the forex (for “foreign exchange; also known as “fx”) market. To get an idea of how big the market really is, consider this:
The average daily turnover in the New York Stock Exchange is around $75 billion. The average daily turnover in the forex market is about $4 trillion. In fact, if you were to add the daily volume of every major stock exchange around the world in the United States, Europe, and Asian, the number would still pale in comparison to the $4 trillion traded each day in the fx market.
Perhaps the wildest part of all is that the forex market is still largely in its infancy stage. Every few years, the Bank for International Settlements (BIS) conducts in-depth research regarding trading volumes and activity in the fx market and then releases this information to the public domain. In the spring of 2010, the BIS released its most recent research findings, and the BIS stated that it expects the fx market to double in size in the next 10 years, which means that average daily turnover in the fx market could eclipse $8 trillion per day by 2020!
The Big Boys
The primary reason most causal investors have never heard of the forex market is largely due to the fact that individual traders have only been able to trade in the forex market since the late 1990’s. Before the late 90’s, the only players in the forex market were The Big Boys – hedge funds, large banks, and very wealthy investors. The reason The Big Boys were the only ones in the market was simple—the minimum contract size was usually $1,000,000, which meant that a forex trader had to have a million bucks to buy just one single contract.
Power of the Internet
We all know that the internet has changed the way we live forever, and it has largely transformed the financial services industry. The forex market, however, was literally revolutionized by the advance of technology and the internet. In the forex market, large banking institutions such as Goldman Sachs, Morgan Stanley, and HSBC are the ones offering bid and ask quotes for currencies, and these large banking institutions did not want to deal with Joe’s $1,000 account. It was literally not worth their time.
However, in the late 90’s, online forex brokers began opening up shop and they would take Joe plus 100 other traders like Joe, and all of a sudden that small $1,000 account was transformed into a $100,000 account very quickly, and then with a few more trader deposits, these online brokers were now able to pass through millions of dollars per day in trading volume to these large banking institutions.
The banking institutions were happy. They don’t care how the money gets to them—they just want large order flow. And Joe is happy because now he can trade in the forex market. And the online forex broker is happy because he can now make a little bit of money off every trade that Joe and these other traders execute.
The State of Today’s Online Trading World
The days of minimum account sizes being $1,000,000 are now history. Today, a trader can open a forex account with an online broker for as little as a $100 deposit, and some brokers will even allow smaller initial account balances. The forex market has literally been revolutionized by the advance of technology, much to the joy of traders, brokers, and dealing institutions.