Factors
that caused Foreign Exchange Volume Growth
Foreign
exchange trading is generally conducted in a decentralized manner, with the
exceptions of currency futures and options. Foreign exchange has experienced
spectacular growth in volume ever since currencies were allowed to float freely
against each other. While the daily turnover in 1977 was U.S. $5 billion, it
increased to U.S. $600 billion in 1987, reached the U.S. $1 trillion mark in
September 1992, and stabilized at around $1.5 trillion by the year 2000.
Main
factors influence on this spectacular growth in volume are indicated below. For
foreign exchange, currency volatility is a prime factor in the growth of
volume. In fact, volatility is a sine qua non condition for trading. The only instruments
that may be profitable under conditions of low volatility are currency options.
Interest
Rate Volatility
Economic
internationalization generated a significant impact on interest rates as well.
Economics became much more interrelated and that exacerbated the need to change
interest rates faster. Interest rates are generally changed in order to adjust
the growth in the economy, and interest rate differentials have a substantial
impact on exchange rates.
Business
Internationalization
In
recent decades the business world the competition has intensified, triggering a
worldwide hunt for more markets and cheaper raw materials and labor. The pace
of economic internationalization picked up even more in the 1990s, due to the
fall of Communism in Europe and to up-and-down economic and financial
development in both Southeast Asia and South America. These changes have been
positive toward foreign exchange, since more transactional layers were added.
Increasing
of Corporate Interest
A
successful performance of a product or service overseas may be pulled down from
the profit point of view by adverse foreign exchange conditions and vice versa.
An accurate handling of the foreign exchange may enhance the overall international
performance of a product or service. Proper handling of foreign exchange
generally adds substantially to the rate of return. Therefore, interest in
foreign exchange has increased in the past decade. Many corporations are using
currencies not only for hedging, but also for capitalizing on opportunities
that exist solely in the currency markets.
Increasing
of Traders Sophistication
Advances
in technology, computer software, and telecommunications and increased
experience have increased the level of traders' sophistication. This enhanced
traders' confidence in their ability to both generate profits and properly
handle the exchange risks. Therefore, trading sophistication led toward volume
increase.
Developments
in Telecommunications
The
introduction of automated dealing systems in the 1980s, of matching systems in
the early 1990s, and of Internet trading in the late 1990s completely altered
the way foreign exchange was conducted. The dealing systems are online computer
systems that link banks on a one-to-one basis, while matching systems are electronic
brokers. They are reliable and much faster, allowing traders to conduct more
simultaneous trades. They are also safer, as traders are able to see the deals
that they execute. The dealing systems had a major role in expanding the
foreign exchange business due to their reliability, speed, and safety.
Computer
and Programming development
Computers
play a significant role at many stages of conducting foreign exchange. In
addition to the dealing systems, matching systems simultaneously connect all
traders around the world, electronically duplicating the brokers' market. The
new office systems provide full accounting coverage, ticket writing, back
office processing, and risk management implementation at a fraction of their previous
cost. Advanced software makes it possible to generate all types of charts,
augment them with sophisticated technical studies, and put them at traders'
fingertips on a continuous basis at a rather limited cost.
