So you are trading on the exchange rate? What's happening in the background? I guess someone is writing these option contracts and backing them with real currency?
In lower-end forex shops, you're simply authorizing your broker to calculate how much money you would have won or lost had the trade actually occurred and debit/credit your account accordingly. No foreign currencies change hands and no financial instruments are implicated.
These are called "bucket shops" and they're so slimy that Bitcoin exchange operators feel obligated to describe that they're not like them.
Wow. The more things change, the more they stay the same.
More than a century ago, Jesse Livermore[1] made and lost several fortunes trading stocks via bucket shops. Not unlike what happens to current day card counters, the bucket shops banned Livermore. Bucket shops (at least for stocks) have long been illegal in the USA.
What exactly is slimy about it? It's all based on a published exchange rate, right?
The original bucket shops were only slimy because they could have real traders at the exchange manipulating the price to wipe out customers in the bucket shop. (as far as I know)
You can do that in many forms. You can go to a (daytrading) firm who either actually buys exactly what you tell them, or they pool up the clients' positions in some way to decrease their transaction costs. FX market is extremely liquid and fully automatized, settlement is usually done in batches but retail clients do not need to worry about that. Obviously there are contracts behind this, but there's no need to write a new contract every single time.
There are other forms of FX trading. For example, you can go to 'betting' sites to bet on currency rate movements -- for example, in the UK this is usually better for retail clients than normal FX trading as the profits fall under betting profits and not trading profits, and the former are lower. (Ridiculous, I know.)
