Foreign exchange currencies are the largest, most dynamic market in the world. About $ 1.88 trillion in currency is traded daily on a market that literally doesn’t sleep. Centered in Tokyo, London and New York, traders operate smoothly across borders and time zones, even multiples of $ 1 billion, in transactions that take less than a second.
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And the development of the Forex market in its current form has left it almost unrecognizable since 10 years ago. Back then, banks traded currencies on behalf of their clients through merchants who held multiple phone calls or perhaps using the relatively new electronic systems offered by Reuters and Electronic Broking Services (EBS). But today, customers can work with banks on a number of platforms, and the quiet hum of computers has removed the noise level from retail floors.
“Old timers” complain that a large number of “personalities” have been exhausted from the trade by the rise of impersonal systems. But the market itself is, if nothing else, stronger now than it was then. Many banks and trading platforms report a large increase in recent traded volumes. And, by allowing some growth in market share, most believe that overall trading activity has increased as market transparency and access to it has improved where it is much easier to see what everyone is doing.
EBS recently said that half of its 35 busiest trading days since the company was launched 10 years ago were in the first two months of 2004. Reuters said it saw 35 percent growth in 2003 compared to 2003 in spot market transactions and that year, to date, he estimated that the amount of spots would be 50 percent higher than a year ago.
How Forex Comes Into Its Own!
“FX has come of age as an asset class in the last five years,” says Nick Beecroft, head of foreign exchange trading at Standard Chartered. “There are a lot more activities of active hedgers and asset managers in other classes who care about foreign exchange much more than five years ago, let alone 10 years ago.”
At that time, the market mainly consisted of direct transactions between banks. The technologies introduced are designed to replicate these direct offers. Approximately 50% of foreign exchange transactions were conducted by interviewing two contracting parties, and an additional 35% through voice brokers, who “matched” bids and bids without either party knowing who the other party was.
In other words, there was no “transparency” in the market because no one ever knew what someone else was actually doing!
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Reuters launched its first screen-based system in 1982, and in 1989 it followed it with a conversational platform that mimics dealer phone trading. In 1992, a matching system was launched designed to reproduce the role of voice mediators. The EBS Matching Platform was launched in 1993 in an attempt by banks to curb Reuters ’development of a monopoly position.
The creation of electronic intermediation for the interbank market has given smaller banks, which have never had easy access to the most favorable prices, the opportunity to do business with larger banks on an equal footing because of the transparency they have with electronic foreign exchange pricing. Today, only a few specialized brokerage houses are still operating, and the bulk of interbank business flows over Reuters and EBS platforms.
Look, Mom … No banks!
Since then, however, there has been another earthquake in the Forex market … an approach to price transparency by people outside the good old banking world.
You can stream real-time market prices across your desktop!
Web platforms such as Gecko Software’s Track N ‘Trade Forex give anyone with an Internet connection the opportunity to get offers for any major currency pair and trade on their own. And the other side could just as easily be another fund manager as the bank!
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“The market has changed more in the last three years than the previous seven,” says John Nelson, head of the global foreign exchange market at ABN Amro. “One move of the key will send the trade from the background of one counterparty and place itself in the background of the other counterparty almost instantly.”
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And, this rapid delivery of prices has now leveled the playing field and expanded the reach of foreign exchange trading beyond the core market of investment banks.
“What differentiated banks from customers back then was that banks could see real market prices and customers didn’t. Rewind so far and see real-time market prices spill over over my desk,” says Justyn Trenner, executive director of Client Knowledge, an independent research firm. “This makes it much easier for more sophisticated fund managers to actively trade foreign exchange as an asset class.”
But watch out …
… don’t trade these things on a daily basis, because the almost instantaneous spread of news, data and price information has led to what market theorists call high efficiency – the exact price at any time. This affected the way currency pairs moved.
“You get more zigzags and zigs in the trend than you’ve ever seen because everyone reacts to every news at the same time,” says Chris Furriess, senior currency strategist at 4Cast, who compared today’s behavior to a shoal of fish that all change direction at once .
But the advantage of more dramatic intraday price movements, especially in the last two years, is the higher overall volatility you can earn if you catch a general multi-year upward or downward trend and ride alongside ADR stocks – international stocks traded through the NYSE!
“Having absorbed the uncertainties surrounding the launch of the euro and despite the reduction in the number of traders, this is a very healthy time for the market,” says Mark Robson, head of treasury and fixed income at Reuters.
There are new direct players as a result of new trading opportunities as the price field is leveled. Many smaller banks are now on the sidelines.
Once again, they can specialize in their regional currency, but are usually clients of larger banks due to the cost of a new wave of trading technology.
Several banks with the deepest pockets have developed and run successful in-house e-commerce platforms that add the amount they trade and their profits. In return, they can afford to offer customers bespoke products that are becoming the norm.
“Intense competition in this space means everyone is trying to differentiate themselves through customization,” says Joe Noviello, director of e-speed information, Cantor Fitzgerald’s online platform, which expanded to Forex trading last year.