Handbook of Exchange Rates

1.6 Summary

This chapter examines the state of play in the global FX market, which reflects both stability and rapid technological change. As ever, currency trading still takes place on a decentralized market in which most customers rely on professional dealers to provide liquidity. Currencies are still traded to facilitate international trade, hedge risk, earn speculative returns, and to profit from market making. The USD, JPY, and EUR remain the dominant currencies and trading is still concentrated in London and New York. The best-informed agents in the market continue to be financial institutions, especially hedge funds. Corporate customers continue to eschew speculative trading in spot markets and provide liquidity.

In the early 1980s, all FX trading was done by phone, transparency was low, and customer transaction costs were high. The lack of transparency resulted in high levels of interdealer trading relative to end-customer trading. In the early 1990s, the introduction of electronic brokers to the interdealer market brought a huge increase in transparency, and the share of interbank trading began to fall even while trading volumes rose.

The electronic revolution finally reached end-customers around 2000, when single-bank platforms and multibank platforms allowed institutional customers to trade electronically with their dealers and with each other. Market transparency rose further, trade processing costs fell due to straight-through processing, and customer bid–ask spreads ...