The foreign exchange market (forex market) is an integrated active financial market that facilitates investment activity by offering price discovery mechanisms. This is done through raising the purchasing power of buyers and thereby enabling the transfer of funds in the international money market. Since 2010, the world money market has seen growth and innovation, all thanks to the advent of electronic communication networks (ECN) in the foreign exchange industry. ECNs have boosted day-to-day trading volumes, opening up new opportunities for institutional participants as well as participants in the retail forex space.
Analysts at Technavio report that, along with the ECN platform, other technological changes like the use of algorithmic trading, straight through processing (STP), and e-FX trading platforms have brought down the bid-ask spreads and also deepened the liquidity in the money market across the globe. Therefore, there is no doubt that technology has made a positive impact on the global foreign exchange market starting from the year 2010 through 2015.
But is technology alone responsible for the growth and widening of the forex market? While technology is a major driver, we cannot ignore the fact that central banks, hedgers and speculators have also contributed to the dynamic structure of the international money market. Also, participation of non-dealers, along with non-reporting banks and proprietary trading firms, are also responsible for the splendid growth that the global forex market has experienced in the past few years, and is poised to experience in the coming years as well.
The integration of the financial market with clearing houses is yet another factor that has contributed to the expansion of the forex market. With effective communication taking place between the traders and the clearing houses, the risks associated with forex trading have also diminished. All these factors have collectively contributed to the growth of the global foreign exchange market. So much so, that the global forex market was valued at over $2 trillion in 2015 and is expected to record a CAGR of 6.76% by 2020.
Geographic-related performance of global forex market
Along with the factors that have contributed to the growth of the world forex market, it is equally important to understand the geographical spread of the market. In fact, a lot about the money market is influenced by the countries / continents involved in international money transfers.
Technavio reports place North America as the biggest player in the forex market, followed by Europe and the Asia Pacific Countries (APAC). In the year 2015, the global market stood at around $2 trillion in North America, $764 billion in Europe and $127 billion in the APAC market, respectively. By the year 2020, the financial pundits predict these markets to grow at a CAGR of 7%, 6% and 5% for the three geographical areas mentioned above.
At the same time, factors like collusion in the forex market due to the entry of new participants and lack of transparency in dealings backed with gaps in risk management practices are some of the major challenges facing the global foreign exchange market. However, with the adoption of better structuring, pricing tools, and other technological advancements, the market is sure to overcome these challenges to a great extent.
