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The Foreign Exchange Business

forex

The Forex market is a global and open market that is used to trade foreign exchange currencies.  Currency exchange operations in the Forex market take place on a 24 hour basis with the exception of the weekends.

In international business, currency conversion is required on a daily basis.   Global Financial Centres such as London, New York, Hong Kong act as hubs for buyers and sellers to trade in financial instruments.  Typically, the income for such FX trades comes from the largest players in the financial market like  BNY Mellon, Goldman Sachs and Citi.    Traders deal Dollars, Euros, Yen etc. on behalf of investors (the investor profile typically being large institutions).

Since ancient times, people have always needed liquidity to trade.   Greeks and Egyptians operated a limited exchange of coinage and there are references in Biblical times to ‘money-changers’.

How FX trading originally took place was on the basis of the gold standard that was held by a coin.   If a coin from Greece held more gold than an Egyptian coin, this allowed a merchant to pay for an item with less Greek coins that he would he have if he were holding Egyptian coinage.   The core principle of FX trading has not changed in thousands of years.  To this day, people talk of the ‘gold standard’ and currencies remain inextricably linked to gold and silver.

As banking became more sophisticated over the centuries, so too did the foreign exchange market.    By 1913, Sterling was the largest traded currency in the world, given Britain’s prominent position at that time in terms of empire and colonialism.

By that stage, banks around the world were completing large volumes of currency trading and charging commission on such trades.  The business had become extremely profitable mainstream business.

After World War II, an international agreement called the ‘Bretton Woods Accord’ was put in place permitting currencies to fluctuate only by 1% from their base.   In 1954 Japan changed their own laws so that Yen could fluctuate beyond these restrictions.   This allowed the Bank of Tokyo to attain the number one position globally in terms of Forex trading at that time.    It also brought about improved accessibility and the trading of many Oriental Currencies that had been absent from the market up to that point.

In 1971 President Nixon put in place fixed currency exchange rates with permission for currencies to fluctuate by 2%., an agreement known as the ‘Smithsonian Agreement’.  This again proved to be too restrictive.   In 1973, this latest agreement effectively came to an end.   Trading in Forex tripled worldwide at the beginning of the 1970’s.   Computer trading began at this time, and this is when the market started to have more of modern look and feel.   Telex and telephone would have been the trading methods of choice prior to this point.

At the beginning of the 1980s, China started to permit limited Forex trading. South Korea joined the free market shortly afterwards.

What really accelerated development of foreign exchange trading was the technology revolution.   The invention of the telephone and Telex were critical to the growth of the market.   Both forms of communication allowed for foreign exchange trading on a global scale, as more and more countries had access to such technology.

Today FX ​​trading is a 24 hour phenomenon, with the majority of such trades being placed via Straight Through Processing (STP) using electronic trading platforms such as Reuters and 3000 Electronic Broking Services.   There is a complicated structure in place involving brokers, dealers, banks and Investors.   An FX deal selling USD 1 million for example would not raise an eyebrow.   This would be considered a small trade by today’s standards.

Arguably, politics has had a big influence on the development of currency exchange.   Just looking at the 20th century, political agreements played key roles in shaping the face of the market.   Individual countries adopting their own laws complicated things further as each country tried to find its’ own path in this fast-growing area of business.

Can the everyday person trade FX?   It requires a large outlay to get into such a market and the market is in the main restricted to large instiutions that can trade millions of Dollars daily.   The relevance to ordinary people is quite simply in terms of global travel.   No matter where we go, we change currency as we move from country to country.   The Forex market is represented in every country in the world.

Where do we go from here?  The internet has allowed for huge and rapid growth in the market.   Can the technology revolution continue to support growth at this speed?   STP trading – automation of trading using trading platforms, SWIFT etc – allows companies to leverage economies of scale.   Can STP be increased still further or has the level of trading reached a plateau?

Computers are getting faster, processing power is increasing by more and more incomprehensible speeds.   Such advancements will allow for the possibility of further reductions in costs and economies of scale for electronic trading.

Company processes will need to be more streamlined.   They will need to find constantly quicker and more efficient ways to handle volumes of trading.   Resources with IT skills will be highly sought after in the search for bigger pieces of the lucrative FX pie.   The world of Bill Gates has today merged seamlessly with the world of the ancient Greeks.

Image courtesy of Wikimedia Commons

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