Unlike stocks, futures, or options, currency trading does not take place on a regulated exchange, and it is not controlled by any central governing body. There are no clearing houses to guarantee trades, and there is no arbitration panel to adjudicate disputes. All members trade with each other based on credit agreements. Essentially, business in the largest, most liquid market in the world depends on nothing more than a metaphorical handshake.
At first glance, this ad-hoc arrangement is bewildering to investors who are used to structured exchanges such as the New York Stock Exchange (NYSE) or the Chicago Mercantile Exchange (CME). However, this arrangement works in practice. Self-regulation provides effective control over the market because participants in FX must both compete and cooperate.
Additionally, reputable retail FX dealers in the United States become members of the National Futures Association (NFA), and by doing so, FX dealers agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies does so only through an NFA member firm.1
The FX market is different from other markets in other unique ways. Traders who think that the EUR/USD might spiral downward can short the pair at will. There is no uptick rule in FX as there is in stocks. There are also no limits on the size of your position (as there are in futures). Thus, in theory, a trader could sell $100 billion worth of currency if they have sufficient capital.
In another context, a trader is free to act on information in a way that would be considered insider trading in traditional markets. For example, a trader finds out from a client who happens to know the governor of the Bank of Japan (BOJ) that the BOJ is planning to raise rates at its next meeting; the trader is free to buy as much yen as they can. There is no such thing as insider trading in FX—European economic data, such as German employment figures, are often leaked days before they are officially released.
Before we leave you with the impression that FX is the Wild West of finance, note that this is the most liquid and fluid market in the world. It trades 24 hours a day, from 5 p.m. EST Sunday to 4 p.m. EST Friday, and it rarely has any gaps in price.2 Its sheer size and scope (from Asia to Europe to North America) make the currency market the most accessible in the world.