Axel Pierron
Axel Pierron

Overcoming market turbulence: e-FX helps weather the financial storm

The current financial crisis has eventually impacted the FX market, creating a stressed environment for FX market players, with an increased volatility, a high turnover and major concern about liquidity. However, the current crisis is a challenge as well as an opportunity for the FX markets. Whereas the hedge fund industry and their leveraging have come under the microscope, FX has proved to be more than just a stable asset class. Though high volatility has been the order of the day, more investors have started believing in parking their money in FX rather than in equity markets.

First Published: e-Forex Magazine 34 / Leader / January, 2009

To understand more about the impact of the crisis, it is important to look at the situation in the FX market in the past few years before the liquidity crisis started affecting the market. The growth in FX trading turnover originates from the various instruments but specifically, FX swaps turnover growth was strong till the crisis, making the largest contribution to the overall market growth. Financial institutions were the main drivers for this growth of turnover with, according to the BIS, half of the increase in turnover over the past 4 years coming from this segment. The advantages of short term investment horizon, the emergence of foreign exchange as an asset class for portfolio diversification and the emergence of algorithmic trading have driven this growth. In terms of volume, the major market participants are still the large banks that participate to the interdealer market. Nevertheless, smaller participants, such as hedge funds, outnumber the large banks and are playing a bigger role particularly...continued

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