From Stonehenge to the Asteroid belt or How FX Markets Have Changed

FX markets have come a long way. In the late 1980s and 1990s, the market resembled Stonehenge in that a few silos dominated the landscape. They were, in fact, the market. It was a very static affair with high barriers of entry and almost no difference in what the few banks offered. Today’s market looks more like our solar system’s asteroid belt. There are thousands of market participants that come in all shapes and sizes. They are independent but connected entities. Barriers to entry are low. As a result, the entire market is in a state of flux which fosters innovation. Customers have many choices and competition is strong.

The original banks are still around. I liken them to the planets; a small number of larger entities that still dominate the area around them but exert much less influence on the market at large.  In FX, like in other markets before it, a number of forces came together to affect this change.

Technology innovation and regulation move markets ahead

There are some great examples of how markets have developed, once regulation was introduced that leveled the playing field, or after innovation in technology changed the way business was done, or both.  Compare the US airline industry prior to the Airline Deregulation Act of 1978 and now. Think of the telecommunications industry before the Telecommunication Act of 1996 and now. In both cases, industry regulation has lowered the barrier of entry dramatically which in turn opened up the door for technology innovators to have a shot at a piece of the market. Both factors led to market expansion and changed who the dominant players were in both industries.

While it is still subject to debate to what extent regulation will ultimately affect FX, especially FX spot trading, I believe we are today at a crucial moment in time of our industry.  Regulation will have a direct and indirect effect. Direct regulation is still being written for the most part. Already, regulation is changing how banks and brokers do business in related areas that have an FX component; just think of their proprietary trading desks.

At a recent industry conference, it was no surprise that regulation was a topic in almost every conversation. Participants were generally concerned. Aside from the fact that regulation of any industry is always also driven by a political agenda (which is a cause of concern), some areas will be more impacted than others. Participants seem to agree that significant changes to the regulation of FX options and possibly derivatives are to be expected.

FX-in-the-cloud more valuable than ever

It has been pointed out before that the Chinese word for crisis is composed of two characters that individually stand for ‘opportunity’ and ‘danger’.  While nobody really knows what the impact of regulation to FX markets will be, I definitely see opportunity. Integral, through its FX-in-the-cloud concept, offers every market participant the means to engage in new business opportunities with little upfront IT and capital investment. In these uncertain times, cloud computing is the perfect vehicle to test new business models. Or, just use this shared IT infrastructure as a hedgeto wait out what the business impact will be and defer any significant IT investments to when the fog has cleared. In the meantime, use our infrastructure to continue business as usual. (Needless to say ,I don’t expect anyone to switch back, once they experience the power of our platform first hand.) Either way, if your current FX platform doesn’t offer cloud computing, I encourage you to talk to us.