Since the 1970s, as a result of advancing globalization and international trade, it is becoming increasingly more common for international financial transactions to take place. The result has been a profound evolution in the Forex market, not simply in terms of trading volume, but also in terms of coverage, structure and transaction methods. Some of the major structural changes that have taken place in the Forex market are as follows:
Massive deregulation in global finance
Governments all over the world have reduced, if not eliminated all together, the control and regulations placed on their respective financial sectors in order to spur growth in the financial system. The resulting effect of these actions has been increased competition, both domestically and internationally, among the various financial institutions.
Savings and investment sectors experiencing a fundamental movement towards globalization and institutionalization.
As a result of these globalization and consolidation efforts, financial institutions and fund managers around the world have greater access to larger sources of investment capital. As institutional funds look for greater profitability, there is a need to search for diversification. In doing so, investment capital spills across national borders and in currency markets in increasingly larger figures than ever before.
If the world operated on a single currency, we would not have a Forex market, nor would we have Forex rates. The reality we live in, however, is very different. Our reality comprises of a multitude of sovereign nations, each with their own respective national currencies. One of the most important roles the Forex market plays is in helping to facilitate trades among various nations around the world. If the Forex market didnít exist, there would be no mechanism for facilitating payments between exporters and importers of different countries. Before the previous two decades, the Forex market was determined mainly by the large commercial banks, since they were the main intermediary between trading partners.
With the loosening of restrictions in the financial sectors, the Forex market expanded to include a larger group of market participants. No longer were the commercial banks the central players, now the market includes brokers and market makers, as well pension funds, hedge funds and investments firms. The focus of the Forex market directed towards immense amounts of overseas capital flows, instead of strictly catering to international trading partners. As Forex trading became more prevalent, competition became more intense and resulted in numerous firms opening their doors and offering Forex trading facilities to the small retail trader.
The development of the World Wide Web and incredible technological breakthroughs in computing powers propelled the development of the Forex market into new heights. With increasing competition growing among the various financial institutions and brokerage firms, the arrival of these technological advances helped firms to lower costs and it allowed them to offer even more services to the small retail investor.
The advances in internet technology allow for real time execution of trades and access to enormous amounts of global market information. The result of which, is a paradigm shift from trading with a brick & mortar institution such as a bank, to a virtual world of online Forex brokers. Even today, the financial markets are still undergoing an evolution and advancing on an almost daily basis. The forex market has grown larger than anyone could ever have envisioned and will continue to do advance as the small retail investor becomes more and more sophisticated.