Exchange and over-the-counter market: what FOREX dealers are silent about

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The idea of getting rich by reselling financial instruments such as stocks or currencies seems very attractive. With the development of the Internet, it has become especially widespread. Numerous brokers and dealers lure an inexperienced client and promise mountains of gold. At the same time, some actively advertise trading in currency pairs at Forex, while others are campaigning to invest in the Russian stock market, that is, to buy shares of domestic companies. Many people think that the difference between these platforms is only in the instruments available for trading. In fact, this is just the tip of the iceberg. But to understand everything, you have to delve a little into economic theory.

What are the markets?

It is customary to single out several main segments in the global financial market: stock (including derivatives), foreign exchange, insurance, investment and capital markets. For the ordinary investor(traders) are interested in the first two segments, while all the others are for professionals. Primary securities are traded on the stock market - stocks and bonds. Derivatives market is a place of circulation of derivative instruments - futures contracts (futures, forwards, options, swaps). In the foreign exchange market, as its name suggests, currency is exchanged.

What are the exchange and OTC markets?

Depending on how the process of circulation of financial instruments is organized, markets are usually divided into exchange and over-the-counter. If we consider the stock, derivatives or foreign exchange market, there are exchange and over-the-counter segments in each of them.

The exchange market is the trading of assets organized by the exchange. It establishes the procedure for conducting trading and settlements, the list of traded instruments and other rules. Counterparties look for each other inside the exchange platform through their brokers, and the exchange acts as a guarantor when concluding a deal. An exchange is a legal entity that has an address for trading and a mode of operation. Previously, “coming to the exchange” literally meant coming to this site and making deals with other traders live. Now everything has become much simpler - the exchange trading market has become almost completely electronic. However, the main task of the exchange remained the same - to organize trading and act as a guarantor of the transaction.

The over-the-counter segment of any market exists outside of the exchange and is much less regulated. The OTC market is not tied to any platform andexists virtually. In some ways, it can be called more free. At the same time, the parties do not have any third party guarantees that the asset will be transferred to the buyer, and the funds - to the seller.

Exchange trading

When encouraging future investors to carry money to the stock market, brokers mean exactly the exchange. Although theoretically, you can buy shares directly from the owner - an individual or a company. However, this is associated with a lot of inconvenience, ranging from the search for a counterparty and ending with documentary registration. The exchange trading market assumes that the exchange takes care of all these concerns.

The client's interests on the stock exchange are represented by a broker. He receives the trader's instructions through a special program (trading terminal) and carries out the corresponding operations. The quotes that a trader sees in his terminal are real deals or orders from other traders. They will be the same if you open, say, several terminals from different brokers.

Thus, the exchange trading market provides a private trader with access to the global trading platform, where he can carry out transactions with other such traders. Neither the exchange nor the broker is interested in any of the traders making or losing money. Their business is built around earning commissions that bidders pay regardless of their performance.

FOREX - over-the-counter currency trading

Unlike the exchange stock market, where shares are traded, FOREX is itsover-the-counter counterpart. This is a global currency trading market, which mainly involves the central banks of different countries and other financial institutions. Small participants join large ones through a number of intermediary organizations. A private trader for trading on FOREX goes to a dealer - a company whose functions are similar to those of a stock broker. Outwardly, everything looks about the same - the same trading via the Internet, the same placing orders for the purchase and sale.

But there are moments that fundamentally distinguish the exchange trading market from FOREX. The matter is that in most cases the FOREX-dealer does not bring the client's order to the global over-the-counter platform, where large banks trade currencies. This is simply impossible, since the lots in this market are measured in thousands or even millions. The dealer brings together his clients in his own mini-market, and most often acts as a counterparty himself. It turns out that the trader trades against his dealer. At the same time, the latter shows currency quotes, which it also sets independently. They are close to real FOREX quotes, but they differ in a way that is unfavorable for the client.

It turns out that a FOREX dealer is a large currency exchange office: he sets quotes and acts as one of the parties to the transaction. It's not hard to guess who will win as a result.

Legal moment

Exchange activity in Russia has been subject to licensing since the mid-90s - now the Central Bank is engaged in this. Serious requirements are imposed on license applicants, including authorized capital,amounting to millions of rubles, which indicates the reliability of the mechanism for entering the exchange stock market through a broker. In addition, they do not have access to the money and shares of their clients - all assets are stored in special accounts on the stock exchange.

But the Central Bank is only trying to take control of FOREX dealers. Recently, their activities have also been licensed, but there are only a few companies that have received the appropriate license. Others simply bypass the law - they work through offshore companies. Thus, for trading on FOREX, a trader transfers his own funds to a certain company, probably registered somewhere in the Cayman Islands or Cyprus.

How to be a trader who, in spite of everything, still wants to trade currencies? Of course, no one can forbid a person to try his hand at FOREX. The main thing is to carefully choose a dealer from among the largest and not risk large sums. But a more reliable way is to go to the Moscow Exchange, in the futures section of which you can buy and sell futures for some currency pairs.