Forex Transacting Fundamentals

Buying and Selling Foreign Exchange

What exactly do you buy or sell when you make a foreign currency transaction?
In reality, you are doing both actions - buying and selling. A transaction of Buying the EUR/USD at 1.2000 is actually buying the Euro and selling the Dollars at 1.2000 cents. If the Euro increases in value in relation to the dollar, the price would increase and the investor will make money.

If for whatever reason, a trader could not execute an order using FXDD, a verbal order to a broker could be the following:

"I buy 100,000 Euros and sell the dollar at the Market"
or
"I buy 500,000 EUR/USD on a 1.2100 stop"
or
"I buy 100,000 Euros vs. the Dollar at the market"

What is required on all verbal orders is the amount, the Currency Pair, the rate and/or the type of order. Simply saying "I buy the Dollar at the Market" is not good enough as it does not say what currency the trader wants to sell.

Bid/Ask Price

Like equities, foreign exchange has a Bid price and an Ask price. The bid is where the market maker will buy. The ask is where the market maker will sell. For investors, the reverse is true. The bid price is where an investor can sell, while the ask is where an investor can buy.

The bid price is always less than the ask price. This makes logical sense as a market maker, like any investor, wants to buy low and sell high.

The spread between the bid and the ask is called the Bid/Ask Spread or Dealing Spread. The bid/ask spread is the premium that market makers charge to provide constant liquidity to a retail client base. For example, the bid and ask might be 1.2050/1.2055. The spread is 5 pips.

Paralleling forex trading to equities, a market maker, like FXDD, is the equivalent of a specialist on the floor of the exchange.

A specialist is always willing and able to make a market (i.e. provide liquidity) to the market/investor. For this service, he will have a bid where he buys the stock and an offer or ask, where he will sell the stock. The bid/ask spread the specialist charges will fluctuate with the general liquidity of the underlying stock.

That same principle applies to FXDD's Bid/Ask Spreads.

Dealing Spreads for the major currencies pairs on FXDD are 2-3 pips wide. Some less liquid currencies will be a bit wider. This reflects the relative liquidity/risk in the professional market for that particular currency pair. The dealing spreads that we quote reflect a normal market making spread given the risks we take and the costs we incur for servicing our clients' business.

Obviously, if the volatility and risk of making a market increase because the markets become less liquid, it stands to reason that our spreads will increase as well. These are universal realities of market makers and should not come as a surprise to knowing investors/traders.