What Is Authorized Forex Dealer?
An authorized forex dealer is a type of financial institution that has received authorization from a relevant regulatory body to act as a dealer involved in the trading of foreign currencies.
- An authorized forex dealer is a regulated financial institution that facilitates transactions in the foreign exchange market.
- The NFA, which is overseen by the CFTC, authorizes forex dealers in the United States.
- Authorized forex dealers in the U.S. are subject to stringent screening upon registration and strong enforcement of regulations upon approval.
Understanding Authorized Forex Dealer
Dealing with authorized forex dealers ensures that foreign exchange transactions are being executed according to the mandated guidelines as set by a country's regulatory body. The National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC) authorize forex dealers in the United States.
The NFA, which is overseen by the CFTC, ensures that authorized forex dealers are subject to stringent screening upon registration and strong enforcement of regulations upon approval.
U.S. investors looking to transact in the foreign exchange market are encouraged to do so through an authorized dealer. By doing so, the investors will know they are dealing with an experienced and well-qualified party and, should anything go wrong, they will have the support of the NFA to investigate any issue that may arise.
Forex dealers in countries outside the U.S. will be authorized by their own governing body. In some cases, the requirements are less stringent than those required in the United States.
Forex trading involves the buying and selling of currencies. Authorized forex dealers facilitate the trading of currencies for retail clients and/or businesses.
Retail forex trading clients are not typically interested in taking possession of the currencies they buy, or delivering the ones they sell. Rather, they buy and sell the currencies for speculative reasons, attempting to profit as the prices of currencies change. Taking delivery of actual currency is called a currency exchange, and is provided by currency exchange houses or banks. That is different than forex trading providing by authorized forex dealers. With forex trading, the client doesn't need to deliver or receive the underlying currencies.
Currencies trade in pairs, such as the USD/CAD, which is the U.S. dollar (USD) versus the Canadian dollar (CAD). This is a direct quote and the rate associated with the pair is how much of the second currency it takes to buy one unit of the first. The rate is always changing, but if the current market price is 1.2667 then that means that it costs 1.2667 CAD to buy 1 USD.
Forex trading is often done on margin. This means that the trader only needs to put up a fraction of the funds required for the trade. For example, buying 100,000 worth of currency may only require that the trader put up 5,000 of their own funds. This means they are using 20:1 leverage, or a 5% margin. This is another reason forex traders don't typically want to take or provide delivery of currencies they buy or sell. Most retail clients utilize leverage and therefore don't have the funds available to deliver 100,000 worth of currency, but they can speculate on the price change of 100,000 by using a fraction of that amount, 5,000 in this example.
A process called a rollover, done automatically by the authorized forex dealer each night, allows traders to speculate without having to deliver or receive the actual underlying quantities of currencies they are trading.
Authorized Forex Dealers (U.S.) Examples
Authorizing of dealers is subject to change over time. There are several authorized forex dealers in the U.S., most of which have been around for many years.
- TD Ameritrade's thinkorswim offers trades in more than 100 currency pairs, as well as access to stocks, options, and futures.
- Interactive brokers is a popular discount broker offering forex trading capabilities and access to stocks, options, futures, and many global markets.
- Forex.com is a dedicated forex broker, regulated in multiple countries.
- Oanda is regulated in several countries and provides simple spread-based pricing on currency trades.