As the dollar continues its slide against the world’s major currencies, it’s a great time to look at the newest generation of hedging tools that make implementation and monitoring of currency hedges easy and cost-efficient. These tools effectively allow an exporter to separate banking functions from hedging functions, and by doing so, provide many firms a chance to cut costs and make their hedging programs work better.

These new tools are the specialized online trading platforms built for foreign exchange trading only, geared to small businesses with hedging requirements, as well as individual traders with a “risk appetite”. These online trading platforms are offered by various counterparties, from small upstart commodity brokers up to money center banks. As is the case in almost any business endeavor, technology has truly leveled the playing field in the online FX trading “space”. That means that the ability to broadcast accurate, real-time, dealable prices is now shared by banks and non-banks alike. In addition, firms offer resources for clients in the form of research, news, live updating price charts and consultation. In short, the historical grip that banks once held on the bid/ask spread for foreign exchange transactions has been broken—we can all access very competitive price quotations, without interruption from Sunday at 5pm until Friday at 5pm. You just need to know who is offering what, and how to make the new technology work best for you.

Typically, online foreign exchange trading is offered by regulated entities known as Futures Commission Merchants (FCM). Various types of financial services firms can register as an FCM. The FCM may be a bank, a stock brokerage firm, or a company that specializes in commodity futures and FX. All FCMs fall under the regulatory purview of the Commodity Futures Trading Commission (CFTC), and they all must be members in good standing of the National Futures Association, a self-regulatory organization that establishes and monitors acceptable business practices for its membership. Enforcement actions are the responsibility of the CFTC. FCMs must maintain certain capital levels and they must adhere to very specific accounting and sales practices. In the commodity world, foreign exchange trading is often referred to as forex.

Online forex platforms are geared to traders and hedgers not interested in actual trade settlement; they do not use the platforms to make a “true” exchange of one currency for another. Instead, at end of day, firms normally act on a default standing instruction from clients to “rollover” any outstanding positions forward into the next delivery date. The rollover includes an interest calculation based on the difference between interest collected on currency balances held and interest paid on currency balances owed. In addition, there are a handful of firms (including my firm, IKON Global Markets) that offer options trading based on the spot currency quotations.

Forex transactions are margin based; customers post a good faith margin that usually is approximately 2% of the estimated value of the position. For example, assume you’re an exporter selling into the UK and you are paid in Sterling. You are concerned that the record strength of the British Pound will be temporary (as of this writing the Pound is making multi-year highs against the dollar of just under 1.9700 USD per GBP) and you want to hedge the value of your sale proceeds, which are 200,000 GBP. You can enter a spot transaction on an online platform to sell 200,000 GBPUSD. That position can be initiated with a margin deposit of 2% of 200,000 GBP or 4,000 GBP. Your FCM will make a calculation in its accounting system and accept from you an equivalent USD amount as margin. Of course, if the Pound continues to strengthen, additional margin money will be required to secure your hedge; on the flip side, your Sterling denominated sale proceeds now buy more dollars. If the Pound weakens, the hedge account will show a positive liquidating balance and the sterling received from your British customer will purchase fewer dollars.

At this stage you begin to see the real power of the new technology: you will be trading on a quotation much narrower than small bank customers ever saw back in “the day”. The sterling quotation might be only four pips wide, for example 1.9652 bid at 1.9656 offered. Getting in and out of positions is a matter of a few mouse clicks, and the software will accept various types of orders: limit orders, market orders and stop orders are all standard, and many platforms include more advanced order types, e.g. OCO orders (“Order Cancels Order”), trailing stops and “if-then” orders.

Exporters can consider using an online forex platform as a hedging tool, i.e. as a means of implementing a financial (rather than a settlement) transaction. The actual exchange of currencies, letters of credit and other financing elements inherent in any export business remain between you and your banker. Although banks offer a wide variety of hedging instruments, exporters should now add into the mix an evaluation of the new generation of online forex platforms. Firms like ours make every effort to offer spot quotations that will meet or beat quotations available from banks. You are the direct beneficiary of this healthy competition. Have at it!

Daniel Uslander is co-head of the Corporate and Private Client Group at IKON Global Markets, a full service foreign exchange dealer and Futures Commission Merchant located on Wall Street in New York City. He can be reached at (212) 482-8272, or by email at dan@ikongm.com.