10 Years of Forex
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Past has always been an amazing indicator of the future. As Stephen Fry once said “How can we understand our present or glimpse our future if we cannot understand our past? How can we know who we are if we don’t know who we were?”
Looking back to get that glimpse of the future or to fully understand the Forex industry is a perfect way of drawing conclusions about where the industry could be going. Currently, understanding the future of the Forex industry is a hotly debated topic, with analysts, economists and industry experts clamouring to provide their expert insight into the future of one of the largest financial industries across the globe.
In honour of our ten-year anniversary, and rather than immediately looking towards what is in store for the future of FX, we’ll be going back over the last decade to see how the dynamic forex industry has been enhanced and developed, and what events have cultivated our current economic climate.
2009 — The year it all began (again)
We’ll begin back in 2009, the year that FXPRIMUS was founded, and the year that followed the subprime mortgages crisis and the collapse of the Lehman Brothers. At the time of our inception the average turnover of the forex market had declined to $3.7 trillion/day from a whopping 4.3trillion, and the globe was just emerging from the ashes of the financial crisis.
The failure of the Lehman Brothers caused dramatic changes across the retail FX Market, where exchange rates experienced unprecedented levels of volatility and the transactions costs for FX soared.
Liquidity providers and market makers had witnessed first-hand the dangers of taking on too much risk when covering their clients, and as a direct result, spreads for retail traders sky-rocketed. The table below gives you an idea of how the spreads differed from 2007 to 2009.
Trading costs weren’t the only factor affected by the crisis though. All brokers are required by law to have a certain level of funds in their account, called the capital requirement. So, due to the financial crisis, the net capital requirement in the US was raised from $10 million to $20 million in May 2009. Driven by stiffer competition, higher capital requirements and higher transactional costs, many smaller brokers simply exited the market or were absorbed by larger companies. As a result, the US retail FX industry had approximately 15 brokers rather than the 30+ recorded at the end of 2007.
It wasn’t just the FX market that was affected by the crisis though! The S&P500 had the worst start to a year in history, dropping 18.62% from January 1 to February 27. The Dow Jones also plunged by an eye-watering 50%, a fall only overshadowed by the Great Depression in 1929 where it fell by 53%… But, it wasn’t to last.
On March 10, a rally began for the Dow, taking the price up to 8500. Stocks also bounced back, by more than 150%, giving hope that the financial crisis woes were beginning to fade.
It wasn’t all rosy across the pond in the UK either. During the same year, much like the US, the UK was still reeling from the crisis as the effects rippled across the Atlantic, when January 19 came around.
During what became known as the ‘Blue Monday Crash’, British banking entered into the spotlight as banking shares collapsed, following an announcement from the Royal Bank of Scotland. RBS announced that they’d suffered the biggest corporate losses in British history, to the tune of £28 billion for 2008.
In a single day its shares plummeted by over 67%, and by another 11% the following day, even though the UK Government agreed to increase its stake in RBS to 70%. Shares in all other British banks suffered as a result.
In response to the readily deteriorating financial climate, on March 6, the Bank of England then announced up to £150 billion spending of Quantitative Easing, in an effort to reduce interest rates and spur on economic growth. At the time, the reactions across the market were huge, with the Sterling depreciating massively against the USD.
As we end a year that saw the inauguration of Barack Obama, the death of Michael Jackson and a plethora of economic activity across the globe, we look towards 2010 to see the response to the rapidly developing economic landscape. Stay tuned for tomorrow’s instalment of 10 Years of Forex!
Part 1|Part 2|Part 3|Part 4 |Part 5|Part 6|Part 7|Part 8|Part 9|Part 10
