What is Electronic Currency Trading?

K.M. Doyle

Electronic currency trading is a method of trading foreign currency using an online brokerage account. The speed at which trades are executed in electronic currency trading is very fast, so traders can quickly respond to changes in the foreign exchange, or forex, market. Trades must be executed by an authorized forex dealer, which is a financial institution authorized to trade foreign currencies by a regulatory body. In the United States, this regulatory body is the National Futures Association (NFA).

Various types of currency.
Various types of currency.

In electronic currency trading, traders use currency trading software in order to analyze potential trades, and to execute trades. Each authorized forex dealer has his own electronic currency trading software platform, so traders would benefit from studying the available options before deciding which software to use. Many brokers will offer a demonstration or trial account so that the trader can assess the software and its features. Because forex futures trade 24 hours a day, each dealer also sets his own daily cut-off, after which trades are posted for the next day. If a trade is executed after the daily cut-off for that particular authorized forex dealer, the trade will be considered to have taken place on the next day.

British pounds sterling have long been a benchmark currency.
British pounds sterling have long been a benchmark currency.

Forex trades are always made in currency pairs, because the trade consists of the currency of one country being exchange for the currency of another. The first currency in the currency pair is called the base currency, and the second currency in the currency pair is referred to as the quote currency. If a trader wants to receive U.S. Dollars (USD) in exchange for British pounds sterling (GBP), the pound would be the base currency and the dollar would be the quote currency. If the trader receives 1.5 dollars for each pound, the price would be quoted as GDP/USD = 1.5. This particular currency pair, the U.S. dollar and the British pound sterling, is sometimes referred to as a cable, a term that is throwback to the days when transatlantic trades were made via cable.

About half of all foreign currency trades take place within the interbank market. This is the market on which banks and other large financial institutions trade directly with one another. These trades are executed only electronically, and typically happen rapidly, enabling banks to take advantage of short-term fluctuations in foreign currency exchange rates. Some interbank trading is done by banks for their large commercial customers, but the majority is simply trades between the banks themselves.

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