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Where Money Screams! Foreign exchange is the largest, most dynamic market in the world. About $1.88 trillion worth of currency is traded daily in a market that literally doesn't sleep. Centered in Tokyo, London and New York, traders deal seamlessly across borders and time-zones, even in multiples of $1 billon, in transactions that take less than a second to complete. And the Forex market's development into its current form has left it virtually unrecognizable from 10 years ago. Then, banks dealt currencies on behalf of their clients via traders holding multiple telephone conversations or perhaps using the relatively new electronic systems offered by Reuters and Electronic Broking Services (EBS). But today, clients can deal alongside banks on a number of platforms and the quiet hum of computers has taken the noise level out of trading floors. "Old timers" complain that a lot of the "personality" has been drained from trading by the rise of faceless systems. But the marketplace itself is, if anything, more vigorous now than then. Many banks and trading platforms are reporting stiff rises in recent volumes traded. And, allowing for some growth in market share, most believe overall trading activity has risen as the transparency of the market, and access to it, has improved to where its much easier to see what everyone is doing. EBS recently said that half of its top 35 busiest trading days since the launch of the company 10 years ago had been in the first two months of 2004. Reuters said it saw growth of 35 percent year-on-year in 2003 in spot market transactions and that year-to-date, it estimated spot volumes to be 50 percent higher from a year ago. As Forex Comes Into Its own! "FX has come of age as an asset class over the last five years," says Nick Beecroft, head of foreign exchange trading at Standard Chartered. "There is much more activity, from active hedgers and from asset managers in other classes who tend to worry about FX much more than they did five, let alone 10 years ago." Then, the market largely consisted of direct deals between banks. The technologies that were introduced were designed to replicate those direct deals. Roughly 50% of foreign exchange deals were conducted by conversations between two counterparties and a further 35% were conducted through voice brokers, who "matched" bids and offers without either side knowing who the counterparty was. In other words, there was no "transparency" in the market because nobody ever knew what anybody else was really doing! Reuters launched its first screen-based system in 1982, and in 1989 followed it up with a conversational platform that mimics dealers' telephone trades. In 1992 it went live with a matching system designed to reproduce the role played by voice brokers. EBS's matching platform was launched in 1993 in a bid by banks to curb Reuters' development of a monopoly position. Creation of electronic broking for the interbank market gave smaller banks, that never had easy access to the best prices, the opportunity to deal alongside the bigger banks on an even keel because of the transparency they have with electronic pricing of foreign exchange. Today, only a few specialist voice-broking firms still operate and the bulk of interbank business flows over Reuters and EBS's platforms. Look Mom... No Banks! Since then however there has been another earthquake in the Forex market... the access of price transparency by people outside the good old boy banking world. You can get real-time market prices streaming over your desktop! Web-based platforms like Gecko Software's Track N' Trade Forex give anyone with an internet connection the ability to get quotes for any major currency pair, and do the trade all by themselves. And, the counterparty could as easily be another fund manager as a bank! "The market has changed more in the last three years than the previous seven," says John Nelson, Global head of FX markets at ABN Amro. "One stroke of key will send a trade from the back office of one counterparty and settle in the back of the other almost instantly." And, this rapid price delivery has now leveled the playing field and extended the reach of FX trading well beyond the core investment bank market. "What differentiated banks from customers then was that banks could see the real market prices and customers couldn't. Fast-forward to now, and I can see real-time market prices streaming over my desktop," says Justyn Trenner, chief executive of Client Knowledge, an independent research firm. "This greatly facilitates the more sophisticated fund managers in actively trading FX as an asset class." But Watch Out... ...don't day trade this stuff because the near instant dissemination of news, data and price information has led to what market theorists call high efficiency - an accurate price at any given time. It has affected the way in which currency pairs move. "You get more zigs and zags within a trend than you used to see because everybody reacts to every piece of news at the same time," says Chris Furriess, senior currencies strategist at 4Cast economic consultancy, who likened today's behavior to a school of fish that all change direction at the same time. But, the benefit of more dramatic intraday price movement, particularly over the past two years, is greater overall volatility that you can make money from if you catch a general multi year uptrend or downtrend and ride along with ADR stocks - international stocks traded across the NYSE! "Having absorbed the uncertainties around the launch of the euro and despite a contraction 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 playing field has been leveled. Now many of the smaller banks have been relegated to the sidelines. Once more they may specialize in their regional currency but they are more usually clients of the bigger banks because of the expense of the new wave of trading technology. The few banks with the deepest pockets have developed and operate successful e-trading platforms of their own that add to the volumes they trade and their profits. In turn, they can afford to offer clients the tailor-made products that are becoming the norm. "The intense competition in this space means everyone is trying to distinguish themselves through customization," says Joe Noviello, chief information officer at e-speed, Cantor Fitzgerald's online platform, which expanded to offer Forex trading last year.
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