FX Market

OANDA Corporation is a financial services provider of currency conversion, online retail foreign exchange (forex) trading, online foreign currency transfers, and forex information. It is one of the largest non-bank Futures Commission Merchants (FCMs) that specializes solely in spot forex trading. OANDA is a registered FCM with the Commodity Futures Trading Commission (CFTC) and a member of the National Futures Association (NFA).

The name OANDA is short for “Olsen And Associates” named after the founder.

OANDA.com offers an online trading platform (FXTrade), currency conversion tools, a foreign exchange wire service (FXGlobalTransfer), a corporate hedging consulting service (FXConsulting), discussion forums, tables of historical currency data, as well as forex news and analysis OANDA’s historical tables are used by some companies to calculate average exchange rates for accounting purposes. Since these historical rates remain accessible afterwards, they can also be used to define applicable exchange rates for contracts. OANDA provides many Foreign Exchange services besides FXTrade, their FOREX trading platform. They provide conversion tools and currency charts for businesses to integrate into their sites and indexes and information for travelers.

Unique Features

OANDA’s founders published The Forex Trader’s Bill of Rights to highlight what they describe as the fundamental right of foreign exchange traders to a free, open, and stable forex market, including technological efficiency and unfettered access to information.

One feature included in this Bill of Rights is the application of continuous interest, second-by-second, a feature of OANDA’s FXTrade platform. When interest is applied only once a day on open positions (the typical broker’s standard), there is an artificial bias toward shorting weaker currencies (with higher rates of interest), and, potentially, rewarding buyers of stronger currencies with lower rates of interest. The “Bill of Rights” asserts that this practice results in “distorted pricing flows that upset trends, create valuation havoc, and encourage speculation for its own sake.”

Mathematician Benoît Mandelbrot singles out OANDA’s FXTrade technology as one example of how the foreign exchange market should work to ensure liquidity. The forex market, despite its vast size, can be vulnerable to periods of illiquidity. These periods pose a risk to an interconnected globalized economy that is increasingly dependent on foreign currency exchange for currency disintermediation and micro-hedging, along with everyday B2B and B2C cross-border transactions.

History

OANDA is an outgrowth of the Swiss Olsen Group and was created to serve as an internet trading platform to automate techniques based on the group’s 20 years’ worth of research in foreign exchange trading. Much of OANDA’s technology is based on algorithms published in the book High Frequency Finance, which was co-authored by Dr. Richard Olsen, a principal of OANDA and co-inventor of these algorithms.

OANDA Corporation was incorporated in 1996 in the state of Delaware, and initially provided online access to live currency information that was previously inaccessible to the public at large. At its inception, OANDA.com offered free currency conversion tools, tables of historical data, news, and analysis through a multilingual interface, and other information likely to be of use to international travelers.

In 2001, OANDA launched FXTrade, an online forex trading system designed with the aim to lower the costs and risks associated with forex trading. Some of its more innovative features included flexible trade sizes, 24/7 trading, instant settlement on all transactions, continuous interest payments calculated second-by-second throughout the day, and no lot size restrictions (that is, traders could buy and sell any number of units, all at the same rate).

In 2005, OANDA published The Forex Trader’s Bill of Rights to outline its philosophy of what forex markets can and should offer to forex traders. In 2007, OANDA offered spot trading in an expanded list of currencies, including the Chinese yuan.

In 2008 OANDA launched FXGlobalTransfer, an automated online foreign currency transfer service designed to offer corporate clients a low-cost, convenient, and secure method of sending funds globally at any time from any computer connected to the Internet. The same year, OANDA launched FXPedia, an online wiki of forex information and commentary, and FXConsulting, a consulting service for corporate hedging.

The interbank market is the top-level foreign exchange market where banks exchange different currencies. The banks can either deal with one another directly, or through electronic brokering platforms. The Electronic Brokering Services (EBS) and Reuters Dealing 3000 Matching are the two competitors in the electronic brokering platform business and together connect over 1000 banks. The currencies of most developed countries have floating exchange rates. These currencies do not have fixed values but, rather, values that fluctuate relative to other currencies.

The interbank market is an important segment of the foreign exchange market. It is a wholesale market through which most currency transactions are channeled. It is mainly used for trading among bankers. The 3 main constituents of the interbank market are

* the spot market
* the forward market
* SWIFT (Society for World-Wide Interbank Financial Telecommunications)

The interbank market is unregulated and decentralized. There is no specific location or exchange where these currency transactions take place. However, foreign currency options are regulated in the United States and trade on the Philadelphia Stock Exchange. Further, in the U.S., the Federal Reserve Bank publishes closing spot prices on a daily basis.

Market makers

Unlike the Stock Market, the Foreign Currency Exchange Market (Forex) does not have a physical central exchange like the NYSE does at 11 Wall Street. Without a central exchange, currency exchange rates are made, or set, by market makers. Banks constantly quote a bid and ask price based on anticipated currency movements taking place and thereby make the market. Major Banks like UBS, Barclays Capital, Deutsche Bank and Citigroup handle very large currency trading (forex) transactions often in billions of dollars.
These transactions cause the primary movement of currency prices.

Other factors contribute to currency exchange rates and these include forex transactions made by smaller banks, hedge funds, companies, forex brokers and traders. Companies are involved in forex transaction due to their need to pay for products and services supplied from other countries which use a different currency. Forex traders on the other hand use forex transaction, of a much smaller volume with comparison to banks, to benefit from anticipated currency movements by buying cheap and selling at a higher price or vice versa. This is done through forex brokers who act as a mediator between a pool of traders and also between themselves and banks.

Central banks also play a role in setting currency exchange rates by altering interest rates. By increasing interest rates they stimulate traders to buy their currency as it provides a high return on investment and this drives the value of the corresponding central bank’s currency higher with comparison to other currencies.