Monday, June 17, 2013

Factors 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.

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