Every second, OANDA uses competitive interest rates to calculate interest payments on account balances, and to calculate interest on currency pairs held in open positions. (Either a charge or a payment, depending on the interest rates of the currencies in the pair and whether the position is long or short.)

Find out more about how OANDA calculates interest.

OANDA calculates interest rates continuously, by the second, over the entire 24-hour day. This is in contrast to other financial markets, where interest rates are applied once a day for any open trades at that time. Interest is typically calculated using the shortest increment of one full business day.

The standard practice today is that the interest rate attached to any currency only matters if you keep your position open from one day to the next. No matter how your position may have changed during the day.

This is like your electric company ignoring your power usage during the day and basing your rate on how much you happen to be using at 8 p.m. (Forex Trader's Bill of Rights)

A bit of background

In the traditional forex market, there is the notion of settlement date—the date on which a trade's specified amount of base currency is delivered, in return for the specified amount of the quoted currency from a second counter party (based on the agreed-upon exchange rate). Typically, the settlement date is within two business days after the deal date (or one business day for the USD/CAD).

Settlement dates worked fine in the days before technology. But with today's (or even yesterday's) technology, market makers can make quick matches between buyer and seller, then profit off the trade for the rest of the term of the settlement.

To keep a deal on the books until the settlement date, market makers typically use rollover swaps to flip the deal forward. The rollover swap simultaneously closes an open position and opens the same position for the next day at a price reflecting the interest rate differential between the two currencies. Typically, rollover swaps occur at 4 p.m. EST. To avoid rollover swaps (and corresponding interest charges), traders typically close their intra-day positions by 3:59 p.m. EST.

Here's a list of reasons why continuous interest needs to be adopted across markets:

• Continuous interest adds liquidity to the market. Traders hold on to positions longer (or close positions sooner) when end-of-day holdings no longer matter. By contrast, traders close positions unnecessarily with daily interest just to avoid the interest ramifications of the end-of-day rollover swap.
  
  
• Today, the shortest term interest rate is one day. With the introduction of continuous interest rate payments, the yield curve could extend to one-second increments. Central banks could intervene on the micro yield curve to better defend their currencies and deter speculators from holding short-term, interest-free positions.
  
  
• Paying continuous intraday interest requires real-time gross settlement rather than deferred net settlement. With players no longer holding onto their positions to defer cost, there would be more liquidity in interbank settlement systems.
  
  

With the growth of international capital flows and the increased speed at which financial transactions are executed, the old convention of daily interest rate payments has introduced unnecessary instability into the system. So far, the public press and academic literature has failed to draw attention to this issue.