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Market Access, Transaction Costs, and Financial Inclusion in Retail FX: The Case of OANDA
In the field of economics, a key takeaway from Transaction Cost Economics (Coase / Williamson) is that market frictions, such as spreads, investment thresholds and regulatory barriers, let the identified market participant in, but limit the participation of others. When the friction is reduced, the market focus opens up and previously excluded groups are allowed to enter the market. In the UK, OANDA has become the best example of this opening in the currency-trading / spread-betting space. It is generally ranked the No.1 in the UK by virtue of low-cost, ease of onboarding and high liquidity to allow more retail investors to access the product.
Lowering Barriers, Deposits, and Onboarding Costs.
Forex trading, in the past, was an institutional activity. There were large spreads between bid/ask prices, high minimum deposits, and opening accounts took days. Many of these fees have decreased, thanks to online platforms. OANDA is a great example, regularly ranked as one of the best spread betting platforms in the UK with competitive spreads and a transparent pricing approach. In the 2023 UK Leverage Trading Report by Investment Trends, OANDA was named “top broker for Overall Client Satisfaction,” in part due to its designation as “best low-cost broker.”
Similarly, many of the usual minimum deposits have decreased or been eliminated in many basic accounts. Many trades can be initiated with very little cash due to margin trading or spread betting. Not to mention the facts that identity verification using digital means, and mobile or app setup can occur in minutes, not days. These drops in fixed transaction costs (paperwork, licensing, and minimum capital) have increased access to these accounts significantly.
Retail vs. Institutional Investors: Who Gains
For institutional traders whose trades are comparatively larger, they can still trade at lower spreads and have access to tailored services. For small retail traders, the costs of entry were previously thought to be insurmountable. Now and with OANDA as the current market leader in the UK, many casual or new users are able to trade major currency pairs with low upfront capital and modest leverage. This democratization of knowledge has meant increasing numbers of participants, and increased diversity in who participates, in FX markets. But this also increases the potential for retail participants to take on risk.
Ultimately, while institutional market participants may have a deep understanding of macroeconomic drivers, retail participants will depend much more on platform-based tools and tutorials and UI prompts. If clients can onboard easily, spreads are low, and execution is transparent, the retail participant can effectively shift from knowing nothing to trading forward positions faster than ever in the history of trading. The Bank of England effectively summarizes the scale and importance of FX trading for the UK economy in its whitepaper, "How the Foreign Exchange Market Works."
The Accessibility Paradox: Risk and Volatility
More access also has drawbacks. Cheaper and easier access to trading results in greater speculation and potentially leading to trading with leverage that may amplify losses. Retail cluster and herd behavior often involve overconfidence, sub-disciplinary risk behavior, and overreacting to news. Lowering onboarding barriers may reduce friction, but it may also lower guardrails and oversight.
Volatility may also increase in some currency pairs, due to many small players entering or exiting their positions in succession. Risks such as slippage (difference between expected fill price and executed price), sudden spreads in unusual market conditions, or sudden regulatory changes can disproportionately affect small traders.
The Financial Conduct Authority (FCA) has imposed strict rules on leverage caps and risk warnings for CFDs and spread betting, designed to help to protect retail investors (FCA guidance).
FX Markets Before and After Online Brokerage
Prior to modern technology, the predominant way to access retail FX was via telephone, or through a traditional broker. The spreads quoted for minor pairs might be anywhere from 5 pips to 50 pips, with minimum deposits in the thousands. Additionally, proving wealth or status to open an account with a traditional broker was somewhat normal.
After online brokerage, platforms such as OANDA have created a significant reduction in spreads. Major pairs such as EUR/USD may be spread 1-2 pips or lower in many cases. Minimum account amounts can be just a few tens or hundreds of pounds. Execution and feedback are immediate, thereby reducing search costs and uncertainty. The transparency of spreads/pricing (so clients can see the "true cost") leads to fundamental value as misalignment of incentives is an important feature.
Global turnover figures support the population shifts: the Bank of International Settlements (BIS) estimates that average daily volume in FX exceeded $7.5 trillion in 2022, with the largest FX hub in London (BIS Triennial Survey). Institutional transactions comprised most of this volume, but retail ability to tap into the volume cannot be ignored.
Economic Forces Driving Change
A few deeper forces are at play in this change:
- Technological change: Real-time price feeds, the mobile internet, and cloud computing have decreased both latency and infrastructure costs.
- Regulatory pressure: Regulatory bodies, such as the UK FCA, increased disclosures, restricted leverage for retail accounts, and compelled fairness of margins. Some of these regulations diminish extreme risk exposure, while also standardizing costs somewhat.
- Global competition: Online platforms now compete globally, and a UK broker must keep spreads competitive or lose customers to those located in another jurisdiction.
Effects
Enhanced financial accessibility: More individuals can enter FX, diversify their portfolios and acquire trading skills.
-Regulatory tightrope: Regulating bodies must encourage new investors to enter this asset class but at the same time protect them from high leverage, fraud, or deceptive UI without strangling innovation or pouring prohibitive fees on them.
-Compression of margins: As spreads and fees tend to decrease, brokers make more of their profits through volume, ancillary services and premium services.
-Behavioral risks: Ease of entry may lead to behavioral traps: over-trading, chasing losses and losing money by investing in assets without the proper knowledge.
Final Considerations
It helps through the lens of Transaction Cost Economics, declining spreads, minimum deposits, and onboarding friction have led to FX/spread-betting platforms being repositioned from specialist institutional instruments to generalized financial instruments. The ramifications of this transition, with with OANDA ranked No. 1 in the UK, the market being reformed offers genuine consequences: increased market depth, an increased number of participants, but perhaps increased fragility in the financial markets. For learners, this case study is an incredibly robust source: lowering economic friction doesn't just lower cost, it alters who gets to problem solve and how risk is distributed throughout society.
