What is an Online Currency Exchange?

An online currency exchange is an Internet-based platform that facilitates the exchanging of currencies between countries, or businesses, for delivery in a secure, centralized setting.

Key Takeaways

  • An online currency exchange is an Internet-based platform that facilitates the exchanging of currencies between countries, or businesses, for delivery in a secure, centralized setting.
  • An online currency exchange affords immediate transparency, which allows the respective parties to keep tabs on all aspects of the transaction, thereby increasing efficiency, lowering costs, and enhancing security.
  • Forex brokers usually offer online currency exchange as part of their platforms.

Understanding an Online Currency Exchange

An online currency exchange is, as is implied in the term, an online system for exchanging one country's currency for another, whether it be at a governmental level (between countries) or at a corporate level (business to business). It affords immediate transparency, which allows the respective parties to keep tabs on all aspects of the transaction, thereby increasing efficiency, lowering costs, and enhancing security.

Comprised of a network of computers that connect banks, brokers, and traders, the online currency exchange allows the conversion of currencies for delivery. Forex brokers usually offer online currency exchange as part of their platforms. The particular platform that processes the transaction will vary by the broker offering it, the location of the trader, and the currency pairs traded.

​​​​​​​Forex brokers are firms that provide currency traders with access to a trading platform and a method to make online currency exchanges. Some brokers offer the service for free, and others will require a payment, either as a portion of the spread or as a set fee. Most brokers offer the free use of a universal currency converter. Import and export businesses, travelers, freelancers, and many others can determine the exact price of a product or service in any currency from around the globe by utilizing an online currency exchange. Typically, most sites allow you to lock-in the current rate while you make your purchase.

The online currency exchange is frequently part of a broker's trading platform. This platform is the investor's or trader's portal to the markets. As such, traders should make sure the platform and any software have the following features:

  • Easy to use and visually pleasing
  • A variety of technical and fundamental analysis tools
  • Trades can be entered and exited with ease
  • Clear buy and sell buttons, as well as easy-to-read trade pricing
  • Customization of screen layout
  • Ability to set automated trades and trading alerts
  • Flexibility to set order options and entries

Most brokers will offer the use of a free demo account to allow traders to test the trading platform before opening and funding an account. Also, since most brokers are usually remote from traders and investors, those interested in using such a system should research the providers, as fees, availability, security, and currencies serviced can vary widely.

Limitations of Online Currency Exchanges

Not every nation's currency can be exchanged or converted. Some countries have monetary policies that place restrictions on the convertibility of their money. Currency convertibility is essential in a global economy and critical for international commerce. A currency that is nonconvertible poses significant barriers to trade and tourism.

Some brokers may not handle the exchange of currencies for a contract for differences (CFD). During the settlement in a CFD futures contract arrangement, cash payments substitute for the delivery of the asset.

Also, not every broker may handle the exchange of cryptocurrencies. A cryptocurrency is an organic digital or virtual money that uses blockchain or cryptography security. A central bank does not regulate virtual currencies, and the exchange for legal tender is not available for all virtual currencies.