What Is an 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 with the trading of foreign currencies. Dealing with authorized forex dealers ensures that your transactions are being executed in a legal and just way.
- Authorized forex dealers have been given proper authorization by relevant regulatory bodies to facilitate forex trading.
- The National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC) authorize forex dealers in the United States.
- Forex trading is the buying or selling of currencies, in pairs, attempting to profit from the price changes of those currencies.
Understanding the Authorized Forex Dealer
In the United States, the NFA ensures that authorized forex dealers are subject to stringent screening upon registration and strong enforcement of regulations upon approval. The NFA is overseen by the CFTC.
U.S. investors looking to trade foreign exchange should 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 to become a forex dealer in other countries.
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 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). The rate associated with the pair, such as 1.2526 is how much of the second currency it takes to buy one unit of the first. The rate is always changing, but in this example, it costs CAD$1.2526 to buy US$1.
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 only using 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.
Examples of Authorized Forex Dealers in the United States
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.