The retail forex industry is still quite young by any standard. Creative brokers and technology broadened its scope in the nineties. The inherent flexibility of the trading activity has greatly increased customer appeal and made “forex” a common term in today’s lexicon. From an evolutionary perspective, the industry has migrated from early development to broad acceptance in a short period of time, but there is still a ways to go before commercialism matures to commodity-level pricing. The current year of 2011 will be a continuation of the “Third Wave” of evolution that is sweeping the industry, and transparency will be the guiding force for the next period of growth.

The first wave occurred in the nineties. Up to that period of time, trading in currencies was the private playground for very large global banks and financial institutions. Very few wealthy investors could deal with the minimum “1 million” lot sizes, but brokers were beginning to aggregate trading positions and become market makers. The basic premise of a market maker is that he will facilitate your trade no matter what the consequences, which means that he will accept the opposing position to your request. Many regard this as an immediate conflict of interest, but if everyone is making money, then where is the problem.

The “problem” was that there was a lot of money to be made. Internet traders were also a very trusting lot, more keen on acquiring a service that worked rather than performing due diligence on business partners that were never seen “face-to-face”. Blatant fraud amongst the broker community was the result where unscrupulous offshore promoters would acquire client deposits and vanish in a cloak of darkness. At this point, the powers of the Commodities Futures Trading Commission, or “CFTC”, were broadened to encompass forex trading, and a “full court press” of law enforcement and consumer education reduced industry fraud down to tolerable levels.

This industry “clean up” effort accompanied the “Second Wave” of innovation in retail forex trading. It was now easy to review the best forex brokers on Internet pages devoted to the purpose. These “best of breed” brokers created extensive training programs and free demo accounts to address the high failure rates among beginners. The forex broker community continued to expand, driven by the profit opportunities that exceeded most other investment activities due to its “newness” aspect. ‘Mirror” trading and managed accounts increased the alternatives to direct trading, and software innovations from technical analysis to programmed “robots” proliferated as specialization swept the industry.

A “Wild West” atmosphere continued to prevail, but the economic shock brought on by the financial services industry was soon to spread its tightening tentacles to forex in the guise of legislative reform. The Dodd-Frank Act, among other things, increased the regulatory clout of the CFTC, and generated a host of new regulations requiring compliance by a reluctant broker community. Ostensibly designed to protect consumers, the Chairman of the CFTC, Gary Gensler, announced that, “These rules of the road will help protect the American public in the largest area of retail fraud that the CFTC oversees: retail foreign exchange.”

New registration and operating rules, capital funding requirements, and disclosure and reporting regulations will force a degree of transparency on forex brokers that has not been witnessed during its early history. In a recent report on compliance, only 28 firms have complied with new registration requirements, and the CFTC has filed enforcement actions against 14 other firms that have been remiss. Fines have also been levied.

Transparency is the “Third Wave” of forex industry evolution.