The Foreign Exchange Market Today
There have been many factors that have led to the current structure of the Forex market.
Since the early 1970s the Forex market has been profoundly transformed in size, structure, and operation. This transformation is also a result of structural changes in the world economy and in the global and international financial systems. Among the major changes and developments in the international and global financial market are the following:
- The change in the international monetary system from the fixed exchange rate system of Bretton Woods to the flexible/floating exchange rate system of today. With this new system in place, nations can choose to float their exchange rates or to follow other exchange rate pricing policies.
- Financial deregulation throughout the world and the elimination of governmental control and restrictions in nearly all countries. This results in more freedom for national and international financial transactions.
- A shift toward the institutionalization and internationalization of savings and investment. Now, funds managers and institutions around the globe have more capital to invest in the Forex market.
- A shift to international trade liberalization put forth in multilateral trade agreements, such as NAFTA (the North American Free Trade Agreement).
- Major advances in technology. This makes possible the instantaneous real-time transmission of market information worldwide, quicker (almost instant) transactions, and advanced communication availabilities among international institutions.
- The development of innovative, new financial instruments and new theoretical approaches to finance and economics.
All these changes led to a shift in the development of international markets. As a result of this transformation of the Forex, markets have seen enhanced freedom, increased cooperation among nations (which increases activity and, in some cases, profitability and currency value), improvements in trading and informational efficiency, and the creation and implementation of better market techniques and instruments.
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– Abe Cofnas
In the current environment, the Forex market has expanded from consisting of only banks to one where many other kinds of financial and non-financial institutions also participate. The evolution of the Forex – from a range of loosely connected national financial centers to a single integrated international market – has resulted in a system that offers means of trading to not only financial professionals but also individual traders, and one that also plays an important role in our economies – both individual and national.
Since the late 1970s the Forex has seen an influx of financial entities, such as banks, hedge funds, and brokerage houses, as well as individual traders enter the Forex arena. Today, instead of being controlled by national banks and governments, the main factor that drives today’s Forex markets is supply and demand. The free-floating system is ideal for today’s Forex markets as international trade and commerce are abundant in the 21st century. The tremendous growth and application of technology in the Forex market broke down all barriers between nations, as well as time zone barriers eventually resulting in a 24 hour market throughout the American, European, and Asian time zones. Transactions in the Forex market increased from nearly 1 billion dollars a day in the 1980s, to more than $1.9 trillion a day two decades later.
As Forex trading has grown, several international cities have emerged as market leaders. Currently, London, England has the greatest share of transactions with over 32% of the total trade volume. Other leading trading centers listed in order of volume are New York, Tokyo, Zurich, Frankfurt, Hong Kong, Paris, and Sydney.