Introduction
The forex market is decentralised. That means there is no central location where a trader buys and sell currencies is done. Forex traders depend on the currency quotes from the market makers and currency dealers in the interbank forex market. These quotes can be accessed from any location over the internet.
Since it is unregulated, it means that the market makers and dealers in the forex market are free to set the quotes as competitively as they would prefer. However, forex brokers must be regulated by a well-known financial authority. Avoid any unregulated forex broker or forex market intermediary.
Here are the main advantages of the forex market being unregulated.
There is no limit on price changes
Unlike in other financial markets, the price in the forex market can change as much as possible. In the stock markets, for example, various exchanges automatically halt trading on a particular stock if its price wither rises or falls more than 10% within a few minutes. Such fluctuations can be a result of significant news about the company such as;
- Regulatory actions that may significantly impact the company’s ability to conduct its core operations
- News on mergers or acquisitions which can result in excessive buying
- Significant news about the core product of the company
- Unexpected revelations about changes in a company’s financial health
In a trading halt, the stock is suspended from any trade until the market conditions return to normal. In such a scenario, brokers are not allowed to trade the shares on their accounts or for their clients. Effectively, the price of that stock freezes until the suspension is lifted.
The trading halt is often imposed to allow the market to adjust to the news being released or to acclimate. Such suspensions enable the demand and supply of the stock to be matched to ensure seamless execution of trades.
Halting trading of a particular stock lets traders and the market acclimate to the news release and eliminate any potential illegal arbitrage. However, it also denies huge profits to traders and investors who might have legitimately benefited from trading in such volatile conditions.
In contrast to this, the forex market has no such halts. The price of currency pairs can fluctuate to any levels. This allows forex traders to benefit from abnormally extreme market news that results in abnormal volatility. Thus, forex traders can benefit from extreme volatilities.
No short selling restrictions in a bear market
For any trader in the financial market, the goal is to go long when you anticipate prices to rise and short sell when you expect the prices to fall. In the forex market, any trader can either go long or short any time as long as the markets are open. The same cannot be said for other financial markets.
In times of pandemics, natural disasters, calamities, or market crashes, investors are barred from taking short positions. Almost every capital market regulator in the world have measures in place for specific scenarios when short selling is temporarily banned. The reason for this is because short-selling implies that the confidence in the markets is falling. Consequently, this can result in irreversible market crashes that may have ripple effects in the domestic and global economies. Note that while stock trading gets disrupted under these conditions, some other markets like commodity Platinum trading rarely get interfered.
During a global pandemic, regulators can ban short-selling across an entire sector. This measure is meant to instil investor confidence in industries which are deemed critical to the economy. For example, amid the recent coronavirus-induced panic sale of stocks, financial regulators across Europe initiated short-selling bans on shares of some of the highly affected companies.
The European Securities and Markets Authority (ESMA) went further and lowered the threshold for which investors are required to report their short-selling positions. It demanded investors and institutions short selling in the market to provide more information to justify their trades. While such a move is deemed excessive, it aimed at curbing market manipulation. Such manipulations occur when investors deliberately dump large blocks of a company’s share to drive down the price.
Similar measures were implemented globally during the financial crisis in 2008. The temporary bans were meant to prevent panic selloffs across entire stock markets which might have worsened the stock market crash. A stock market crash or sharp selloff can be characterised by continuous drop in US30 or the US500. In some cases, market regulators implement the Uptick Rule, which prevents the acceleration of sharp price declines. In other instances, there are rules which allow traders and investors who are in long positions to exit their trades before the short-selling ensues.
Ease of Trading
In the forex market, traders are free to trade regardless of what is happening in the world. As long as you have internet connectivity and the forex markets are open, you can short sell a currency pair under any condition. No natural disasters, calamities or pandemics that result in sharp price declines can cause short selling in the forex market to be suspended.
Furthermore, being the largest and the most liquid of the financial markets, it is impossible to manipulate the price of currency pairs through short selling. The daily turnover in the forex market is $6.6 trillion. It implies that to manipulate the prices through short selling successfully, market makers and currency dealers in the interbank market must collude and dump trillions worth of currencies. Due to its size, it is unheard of for liquidity to dry up in the forex market; which ensures that trading is often seamless even under the most volatile of conditions.
The absence of such restrictions in the forex market allows a trader to follow trends under any market conditions. Thus, all types of traders can benefit equally from bullish and bearish markets since they are in control of when to open positions and when to exit them.
Conclusion
Unregulated forex market means that forces of demand and supply move the prices. These prices entirely react to any news that impacts the market without outside interference. However, note that central banks can sometimes step in to stabilise a country’s currency in the forex market.
