The currency markets are the largest capital markets, with more than 6.6-trillion in notional value traded every day.
Most of the volume is sold through over-the-counter transactions. A smaller portion is traded through the futures markets and exchange-traded funds. This value would equal 1,650 trillion in notional value using 250-trading days.
The size of the currency markets is much larger than the size of the world stock markets, which has approximately 6.35 trillion in notional value traded throughout a year. Regulation on both currency trading and stock trading is equally restrictive.
In most countries around the globe, forex trading is regulated by the central bank. Generally, the government is in charge of setting up a branch that oversees stock regulation.
How is Currency Trading Regulated?
The central bank will, directly and indirectly, regulates exchange rates. The government can oversee the regulations of the type of currencies available to trade and the brokers that are allowed to participate.
The market movement can also be impacted, but this is accomplished indirectly because most currency exchange rates float in the open market.
Like China, the exchange rate is fixed in some countries, and the government directly controls it. This Chinese currency rate control of their yuan, in turn, affects the U.S. Dollar.
The indirect method includes raising or lowering interest rates and using money market operations to alter the borrowing in a currency. The government treasury can also change a currency by purchasing and selling bonds to make the currency less or more attractive.
The government generally oversees transgressions related to the trading of a currency. In the United States, the officer of the controller of the currency manages currency transactions.
Other government agencies will also participate in regulations. For example, in the United States, the Commodity Futures Trading Commission (CFTC), which is part of the Securities and Exchange Commission (SEC), will oversee currency futures.
The SEC will also manage and issue related to currency Exchange Traded Funds (ETFs).
How are Stocks Regulated?
A government body generally regulates stock trading. There are a plethora of strict rules that are usually enforced when it comes to stock trading.
This scenario is the case because governments believe that many retail investors are involved in stock trading and therefore need the government’s protection to ensure the market regulation is enforced.
Retail investors need an outlet to complain if they believe they have been mistreated.
The most common regulation related to stock trading is who can facilitate the trading. Brokers are required in many countries to be licensed and need to provide this information to customers.
Brokers will also limit the types of transactions a retail client can trade based on their financial situation and experience.
While regulatory bodies generally control who can trade and what companies can list publicly on an exchange, no oversight body controls a stock’s movement.
Many exchanges have triggers that will halt a stock’s movement if it rises or falls too quickly, but over time, the market will drive a stock price.
The Bottom Line
While government officials regulate both the currency and stock markets, they each have a different mandate to control how they trade.
Since more retail investors participate in stock trading, the rules are more focused on consumer protections. This scenario includes the brokers that are allowed to facilitate trading and the companies allowed to list on public stock exchanges.
A central bank generally regulates currency trading, but in some cases, other areas of a government will oversee the trading activity.
Despite forex trading being a larger and more widely traded market, stock trading’s retail nature makes it a more highly regulated business.