It's a big fact that the Forex market is the biggest market in the world. It dwarfs any other. Here are some of the reasons why the Forex market will always remain.
February 04, 2019 | AtoZ Markets - The Foreign exchange (FOREX) market is the most traded and the largest market in the world. Its daily trading volume of over $5 trillion is a lot bigger than that of global equities combined. The Forex market is largely over-the-counter. This means that trading takes place on electronic platforms and through telephone between banks and other market participants. Everyone has an interest in the Forex market. Central banks whose currencies are traded, big corporations and multinationals who sell their products to other countries and buy raw materials from other countries, hedge funds and individual traders who speculate to make profits from currency rates fluctuation are major players. Anyone anywhere can trade in the Forex market, provided he has access to the internet, via a broker unlike the stock market and other markets which are only available to a limited geography. It is opened 24 hours on working days.
Despite the advantages the Forex market has over other markets, many traders and investors still fears about the longevity of the market. How long will this market continue to be? Are we going to wake up one day and see the Forex market disappear? The following reasons highlights why the Forex market will remain, perhaps forever.
Currencies Are Tangible
Currencies are no virtual assets. They are tangible. The fact that the world is getting even smaller highlights the need to currency exchanges. An English man travelling to South Africa would have to exchange Pound Sterling to South African Rand. There is need for an exchange rate which would be determined by demand/supply, central bank rates decision, political and economic events, rates differentials and other factors. People travel for different purposes - business, tourism, sports, education etc. Multinationals also sell their products to residents of other countries and many examples that show inter-dependencies of people and governments all around the world. The world is getting smaller and the smaller it is, the more the need to have exchange rates for currencies. Unless all these stop, the Forex market will remain.
Business Activities Will Collapse and World Economy Shrink
The OTC spot and futures Forex market provide liquidity for businesses to hedge their positions against sudden rise or fall of a currency value. Big companies and corporations also trade in the Forex market from an hedging angle. For example, a car manufacturer based in Japan that sells its automobiles to the United States would want the US dollar value to be stable or fall. If the value of the dollar falls, it will make more in its local currency (yen) when it sells a product in the U.S. In the other way, it will lose if the Dollar goes over the roof. This means that the value in Yen would drop. In order to hedge the risk, it might buy a certain amount of dollar at the futures Forex market to sell at the time its automobile would be available for sale in the U.S. By this, in case the dollar rises it would make some profit from his position and thereby stabilize the price of its products. The market provides liquidity for this. If the Forex market does not exist, a lot of businesses will be at risk. Some might shut down after big losses. The world economy will in turn slump.
Too Massive To Stop
How do you end such a big market? Take $5 trillion from the world's daily business activities, what do we have left? The market is also very much regulated and generally accepted. There will also be a massive unemployment. The world would not want to take such a big risk.
If the market collapse, exchange rates will collapse and people will find it difficult crossing overseas or to even visit neighboring countries. Airlines, shipping companies will surfer. Hedge funds will go out of business and lay off their staffs. Individual traders will pack up. There will be massive unemployment especially in countries that record high trading activities. There are millions of individual retail traders all around the word, a significant percentage of which trade from their homes. There are news and analytics, market education, software, data companies that are in business just because of the Forex market. Many of them will be out of business completely of lose a large portion of their business activities.
It's not even imaginable that one day the Forex market will be shut down temporarily or permanently. The Forex market will remain for many generations with better innovations.
Why do you think the Forex market will remain? Please share your thoughts with us in the comment box below.