Volatility. Mention the word to a veteran interbank FX trader and they will probably say something like, ‘Today’s market is not volatile. Fifteen years ago an unexpected trade number would give you a 500 point move, two hundred in one direction and then three hundred back. All in fifteen minutes. Now a big move is 100 points after non-farm payrolls’. Is there any truth to this complaint? Are markets less volatile today than 10 or 15 years ago?
The forex market is just over a generation old. FX trading became possible when the United States abandoned the gold standard and fixed currency values in 1973. It did not really become an actively traded interbank-market until the 1980’s. The FX market has evolved dramatically throughout its existence. Each step in its evolution has brought more information to a wider audience and more participants to trading.
Fifteen years ago accurate price information was an oligopoly, limited to a few hundred bank traders and brokers in each of the three major markets, London, New York and Tokyo. Anyone wishing to deal in the currency markets had to deal on a price derived from this top level market.
Only the bank dealers knew where the market was trading because the networks that distributed dealing prices were closed systems, only banks and brokers participated. Originally prices were distributed through a network of voice brokers and then, beginning in the late 1990’s through the electronic private dealing systems EBS and Reuters.
That proprietary price information was enough to make the bank dealers some of the most profitable traders in any financial market throughout the 80s and 90s.
Then along came the internet and everything changed. Beginning in the early years of the last decade, small internet based FX companies began offering trading services. Retail customers could open accounts and trade. But they could also open a demo account and get the same pricing information available on the bank dealing systems.
It took a few years for the accuracy of the internet systems to match that of the bank dealers. Once that was accomplished there was no appreciable difference in the price information available to the bank dealer or the retail trader. Anyone with a computer and internet connection could know where the euro or the yen was trading whenever the market was open.
Suddenly the pricing oligopoly of the bank dealers and their customers was blown wide open.
Democracy had come to the forex market. The bank pricing oligopoly in currency trading had been shattered. What had been privileged and proprietary information in 1998, seen only by a select circle of bank dealers was now freely distributed to whoever wanted it.
Accurate pricing meant that more people could participate in the forex market. FX trading volume rose throughout the last decade. More traders meant more liquidity and more liquidity at all price levels meant less volatility. What might have been a violent price gap before the internet could be now filled, even if it wasn’t always, by the prices of thousands of traders large and small. Traders who would never have had access to the forex market before the internet.
The hammer to the cozy world of interbank forex has been the internet currency firms and the beneficiaries are currency traders everywhere.
Chief Market Strategist