The Importance Of Regulating Foreign Currency Exchange
According to the BIS survey, during 2010, the foreign currency exchange market boasted a massive $4 trillion daily turnover. Although many large corporations are affected by the rate of exchange, the average consumer is also affected in many ways. The currency rate of a country is the determining factor of the prices the average consumer pays for many of the products on the market, the cost of holidays, returns on their investments as well as the rates that deposits and loans are based upon.
The effect this market has on so many factors seems to be pushed aside when it comes to regulation. This particular trading market is largely unregulated. The traditional forex market was once the domain of large corporations and leading banks. However, over the years this trend has changed dramatically and private investors have entered the market. This is one of the main reasons why several economists and banks are asking for the market to be regulated.
Foreign Currency Exchange Speculation
Transactions in this trading market fall into two categories – speculative and commercial. Speculative trades far exceed those of commercial transactions and have contributed to a bigger share of the forex market over the last few years. These transactions are undertaken with the sole intent of making a profit from the movements in currencies.
Commercial transactions are based on economic transactions. This type of transactions normally comprises of payments for imports or loans to international entities.
The volume of foreign currency exchange has almost trebled in the past two decades and the ratio of foreign exchange turnover to that of GDP varied from 14 for US and Japan to about 200 for the UK. Singapore has the highest figure at 300. Despite the 20% increase experienced in volume during the three-year period prior to 2010, commercial transactions that were done by governments and corporations experienced a decline of 10%. During 2010, commercial transactions made up a mere 13% of the total foreign exchange transactions during 2010. This is the lowest figure since 2001.
Retail investors trading in forex has grown exponentially since 2007. The transactions in this group account for approximately $135 billion in daily turnover. Speculative transactions attract many who are drawn to the possibility of making huge amounts of money. Although there is money to make, there are many pitfalls to consider. There are obvious factors such as losses related to fraud and excessive leverage. The other risks involved include market volatility as well as a lack of information. Retail investors are unable to gain access to capital flows and large commercial trades as this type of information is available only to the big players in the market. This makes it extremely difficult for the retail investors to gain advantage over the professional players.
The biggest problem facing foreign exchange traders in a non-regulated environment is fraud and illegal activity in the market. Some of the fraudulent activities include ponzi schemes, misrepresentation and excessive commissions. Strict regulations that were introduced during 2010 in the United States to protect retail traders have played a role in eliminating currency fraud in that country.