The brokers have created an exciting picture of the forex market. They say its turnover is $7.5 trillion per day. They make it believe that this market is just there, people and businesses are just exchanging currencies in their every day life and they have no clue that they could exploit this market, it’s like an untouched treasure, and just imagine if you could extract just 0.000001% of that, it would be 75k in a day! Wow, anyone can do it, right?
Well, you have to understand that your forex trading business at the broker has nothing to do with what’s going on out there in the world. Let me give you a couple examples of how the foreign exchange works.
1. A tourist from Europe lands at the airport in Australia. He goes to the exchange booth, gives 500 euros to the teller and receives 820 Aussie dollars.
2. A company in the USA receives an invoice from a European supplier and the amount to pay is 1,000,000 euros. They login to their bank account and make an international transfer. Their bank deducts 1,090,000 US dollars from their account.
In both of these examples, foreign exchange happened. Both of these transactions are added to the daily FX turnover of $7.5 trillion per day.
If you think that by clicking buy/sell at your broker’s platform you can rob these people, you’re making a big mistake. Even if you could, that would be considered as theft and you would get into trouble for that. Imagine that the European supplier received just 900K instead of 1M for some weird unexplained reason (i.e. because of you). This wouldn’t go unnoticed and the deal would break.
Understand that these transactions did not happen through your broker. So how can your broker pay you from that elusive $7.5 trillion per day market? They can’t.
There’s no such thing as the global FX market. The total FX turnover is just a sum of individual transactions that happened, but it’s not the market’s turnover per se. All of the FX transactions are happening at individual sandboxes.
The tourist who is exchanging money at the airport is doing that in the sandbox of foreign exchange booth. The money that the booth receives doesn’t go to any global FX market, it just stays there.
Same thing with the company who wants to pay the supplier in another currency. Their FX transaction is happening in the sandbox of the converting bank.
Likewise, your trades at your broker stay in the sandbox of that broker. So you can only make as much as your broker can pay you. You won’t magically extract money from that $7.5 trillion FX market.
However, the sandboxes are not isolated. There are connections between certain sandboxes around the world, which makes FX a truly global thing, but there’s no centralised market in FX through which all of that $7.5 trillion per day flows.
Is it a dystopia? Does it mean that when you’re trading with a broker you’re buying thin air? It’s kind of true, but when you do it in a bank it’s quite the same – just a different sandbox. Reputable brokers have a similar likelihood of bankruptcy like reputable banks. Neither brokers nor banks are 100% reliable, but they are reliable enough to do business with and make money. Just do your due diligence and avoid obvious scams.