How Digitization Has Transformed the Forex Market

Thirty years ago, investing and trading was the preserve of a few hand-picked individuals on Wall Street. Today, consumers can trade thousands of products quickly and easily from the comfort of their own home.

This transformation has been strongly felt in forex trading. For consumers, the benefits are quite obvious and straightforward. Log on to one of the leading digital investing platforms and chances are you’ll be offered a range of currencies to trade, alongside the usual staple of stocks and shares, cryptocurrencies and commodities.

For investment bankers and brokers, the change is more significant. Digital transformation has reduced friction for traders, making trades more efficient and profitable. It has also spawned a series of new technologies, based on artificial intelligence (AI) and machine learning, which can, among other things, help improve risk management.

David Mountain, EVP – Strategy, M&A, Analytics and Product for UK-based Crown Agents Bank, explains: “Digital transformation and fintech have already had a huge positive impact on the forex market, with further progress The adoption of new technologies creates greater efficiency in the foreign exchange process, reduces costs, speeds settlement and improves transparency.This, in turn, has increased competition in the market and led to new innovations .

“New technology also has the ripple effect of making FX more inclusive in two ways. First, lower costs create benefits for everyone in the value chain and make FX more accessible. Second, the need for Cutting-edge FX solutions are fueling digital innovation hubs in emerging markets, which are emerging as new hubs of fintech.

“FX innovation has the potential to drive intra-regional trade in previously underserved markets. In regions like Africa and Latin America, where regional economic integration is incomplete at the legislative level and infrastructure, technology can be transformative, making doing business and investing easier and more affordable.

How has fintech transformed forex?

The advent of new platforms for making cross-border payments and trading commodities has led to a “democratization” of forex. In 2019, that had catapulted trading in the foreign exchange markets to $6.6 billion a day, according to research by the Bank for International Settlements (BIS). That figure was up from $5.1 billion a day three years earlier.

All of this comes against the backdrop of record times for fintech in general. 2021 has been a “remarkable year” for the sector, according to KPMG’s Pulse of Fintech report, with strong investments and a record number of deals across all major regions. In forex in particular, this is highlighted in Visa’s $929 million deal for foreign exchange payment platform CurrencyCloud, which was announced last summer.

Yet, despite the progress made in the retail market, there is still a feeling that trading forex is lagging behind.

“Few areas of financial services have remained as stubbornly analog, for as long, as trading foreign exchange,” says Seth Phillips, founder and CEO of forex hedging platform Bound.

“It is true that the liberalization of the sector in the early 2000s spawned a number of non-bank currency providers and stimulated competition. But this new wave of FX brokers was mostly made up of ex-bankers whose model was to cut banks’ prices while making a fortune – by charging a variable, opaque markup on the client’s exchange rate, rather than a transparent commission. and easily comparable.

“Commercial foreign exchange trading to date is done primarily over the phone, allowing brokers to offer a customer a competitive exchange rate one day, but earn a big margin another day when the customer is unsure. no time to collect and compare multiple quotes.

“For retail customers – typically those sending money to family overseas – this model has been disrupted by Wise (formerly Transferwise), Revolut and other successful fintechs, which charge customers a flat fee and low for each transfer.”

Phillips thinks digital disruption could finally be coming to commercial FX, with new technologies that allow for a better customer experience, faster trading and greater transparency around pricing.

What is the future of forex?

With its ever-increasing popularity, it is entirely possible that blockchain will be the new frontier of forex trading, enabling platforms and technologies that enable greater digitalization. And it is this emphasis on transparency that would potentially offer the greatest benefit.

Unlike traditional forex trading, where transactions are facilitated by a broker and there is generally little transparency around transactions, blockchain creates a public ledger for each transaction. However, the very nature of blockchain could also prove problematic. Blockchain works by storing information on a network of computers, which means consensus is needed for any changes to be made – this is what made cryptocurrencies, and more recently NFTs, possible. However, this may be a stumbling block for the forex space, as it limits the amount of oversight a regulator would need.

In any case, many believe that the key to advancing the digitalization of forex lies in trading transactions – helping to further reduce friction, making forex trading faster and more profitable for brokers and more transparent for traders. clients.

Eric Huttman, CEO of MilltechFX, says, “We need to focus our efforts on using fintech to help grow the real economy. It starts with treasurers and asset managers who can face huge operational inefficiencies with their FX setups that directly affect their bottom line.

“Now is the time to leverage digital solutions to implement widespread and strategic change. If all parts of the financial services industry want to “build back better” for their customers, using these technologies to establish a more efficient, transparent and cost-effective way of doing things will be vital.

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