The Global Foreign Exchange Market: Growth and Transformation

The foreign exchange market is the world largest financial market, which is measured by daily turnover of global foreign exchange is US$3.5 trillion a day. Day by day transaction of FX market is increasing, more people are join in this market. Before 1990s transaction has been occurred between bank & large financial institution, but after that by the aid of technology individual, non-bank market participants and many investment organization are also involve in this market. Innovations in Electronic Dealing Technology In mid 1990s the FX market was basically phon based and transaction was conducted through bank. The process was : a client first call to a bank to know the exchange rate or bid and ask price for particular amount of foreign exchange transaction. This phone-based network of direct relationships between banks was the principal component of the interbank market, the central source of liquidity in the foreign exchange market. Banks would typically pay away the spread on price-discovery transactions as a necessary cost of doing business. In September 1993, and Reuters Dealing was introduced EBS (Electronic Broking Services), as a reason these interbank dealing arrangements began to shift to electronic protocols. This EBS system enabled electronic price delivery in the interbank market was relatively easily extended to bank-to-client (B2C) relationships. Single-bank portals are bank-owned trading platforms that establish an electronic communications link between the dealer and its end-user clients, supplying that dealers price quotes and trade details electronically. Multi-bank portals are thirdparty platforms that connect an end-user client with price quotes from several banks simultaneously. A Changing Mix of Market Participants Technological development condensed trading costs and also has created new opportunities, for a broad range of market participants. The ability to transact in relatively small amounts on fully transparent prices on these global electronic dealing platforms has led to fundamental changes in the operation of the interbank market. By heightened competition between dealers and The much greater degree of price transparency has led to interbank spread tightening being passed along to end-user accounts in the B2C market. Many of the market-making banks that previously dominated the market have been forced to re-examine their business model as dealing spreads in both the interbank and B2C markets compress. As a result of deal flow in the global foreign exchange market consolidating among the largest global banks, the role of second tier dealers has been evolving. Prime brokerage has recently created new trading opportunities for market participants outside the banking sector which is the professional trading community (PTC).

Increasingly automated trading functions With the technological development, many trading functions once performed exclusively by traders are now increasingly performed by specialized computer programs. What distinguishes recent developments in this area is the use of application programming interface (API), the protocols that connect trading algorithms directly with the live price on electronic trading platforms. With API, a trader can program the computer-based trading model to receive data from the market, process this information according to predetermined rules, and then generate buy and sell orders that are transmitted directly and immediately to the market without human intermediation. The mixture of PTC penetration into the interbank market and computer-based trading on the spot to a stream in the proportion of algorithmically sourced foreign exchange volume. A New, Hybrid Market These three interrelated factorselectronic dealing platforms, a changing mix of market participants, and algorithmic tradingare rapidly changing the cost structure of the foreign exchange market. These market-making algorithms will often analyze client order flow and use the information gathered to guide the dealers risk positioning, defining a form of automated, flow-based proprietary trading. Foreign exchange trading volumes have circled as the barriers to market access and the price of dealing in foreign exchange have declined. Existing market participants trading more, and new members are growing as well in the market. even though these considerable enhancement, some have spoken concern over the growing PTC role in providing foreign exchange market liquidity because these accounts usually use highly leveraged Whether broader PTC participation and the use of high-frequency trading algorithms have helped to moderate extreme price movements. The foreign exchange market is now in evolution period. Electronic trading platforms, algorithmic trading strategies, increasing participants and lowering the cost has been changing the fx market and rising the global trading volume of the market. The organizational structure of many banks is also developing to mirror this new model and these various interrelated, reciprocally supporting changes, foreign exchange markets are suitable and more open, transparent, and liquid.

Foreign Exchange Market Structure, Players and Evolution

. Foreign exchange markets Is the world largest money market and has an impact on employment, imports and commodity prices. FX market is basically a trading with spot and forward exchange activity, increasing volume at a high rate (Between 1998 and 2010 turnover in the FX market grew by over 250 percent). Though FX market is concentrated in New York and London in 2000s, but now scenario has been changing. FX market is now transacting in South Asia (Hong Kong, Japan, Singapore,) , Latin America, Australia, Africa and Middle East. FX markets has a supremacy of the U.S. dollar (USD), more transaction has been conducted by USD about three-quarters of all spot transactions. The euro (EUR) is involved in 46 percent of trades, in part as the vehicle currency within the euro zone. The next most actively traded currencies are the Japanese yen (JPY, 20 percent) and the UK pound (GBP, 14 percent). Together, these four currencies are known as the majors (or G4). Beside spot market a number of other currency-related instruments such as FX futures, currency options, FX swaps and currency swaps swell average daily turnover in FX markets beyond $4.0 trillion. Though FX market is unregulated but Government and Central bank set some regulations. Fortunately, the FX market is sufficiently liquid that significant manipulation by any single actor is all but impossible during active trading hours for the major currencies. The original FX market participants were traders in goods and services. Beyond importers and exporters, the major categories of market participants now include asset managers, dealers, central banks, small individual (retail) traders, and most recently high-frequency traders. Financial institutions are a diverse category that includes hedge funds and other asset managers, regional and local banks, broker-dealers, and central banks. Relative to corporate customers, financial institutions trade larger amounts and hold FX positions for far longer. Financial institutions and commodity trading advisors (CTAs) tend to be better informed than other endusers as they have strong incentives to invest in information acquisition. Private financial institutions dominate financial trading on a day-to-day basis. Corporate customers use FX markets to support the treasury operations associated with their core business activities such as mining, shipping, and manufacturing. Algorithmic trading is a form of electronic trading which is introduced in 1993 where a computer algorithm (or program) determines an order-submission strategy and executes trades. Highfrequency trading relies on their technological advantage to exploit small price discrepancies across different online trading platforms.

Liquidity in currency markets was provided by the bigger commercial and investment banks, global custodial banks, retail aggregators, and high-frequency traders. FX dealers earn income by taking speculative positions and by providing liquidity to customers. The custodian provides liquidity to its clients and in turn counts on receiving liquidity from its regular dealing banks. Retail aggregators operate exclusively over internet trading platforms, bundling small retail trades into larger trades that can be handled conveniently by dealing banks. Some retail aggregators act purely as FX brokers, matching retail trades with quotes from banks. The Electronic transaction has been changed the construction of market, increasing transparency and reduce transaction cost and also make the information flow easy than telephone based information transferred.