Guide to Analysing Companies

ESSENTIAL FINANCE
01 Essential Finance 10/11/06 2:21 PM Page 4

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and Steven Weinberg of the US Federal Reserve, looked at the
foreign-exchange markets. It found no evidence that electronic
trading and the growing use of derivatives had made the
markets more volatile, or that liquidity had been drained away
from them because of the growing use of electronic trading. So
far, so good. The study did concede, however, that the use of
trading platforms that connect the ultimate customer more di-
rectly with the dealer in foreign exchange, reducing still further
the role of intermediaries, may bring more volatility.
If so, the stakes are high. Until the Bretton Woods agreement,
a post-war attempt to stabilise international finance, was dis-
mantled in the early 1970s, fixed exchange rates were the norm.
Today it is hard to think of a developed country that does not
allow its exchange rate to float or, as with the euro, is linked to
one that does. At the touch of a keypad, trillions of dollars-
worth of foreign currencies routinely change hands every day,
much of it in the form of obligations traded as derivatives.
Thirty years ago, markets of this size and scope would have
been unimaginable. In the days of fixed exchange rates, the
market for foreign exchange was a servant of trade, easing the
exchange of goods across borders. Today, as services become
more important in international trade, the value of foreign cur-
rencies changing hands each day far exceeds the value of the
goods being shipped from producer to user.
The first truly electronic services for dealing in foreign ex-
change were launched by Reuters in the early 1980s. The first
systems allowed brokers to communicate directly, but did not
simultaneously match different counterparties, as had been
done over the telephone. That came in the early 1990s, when
Reuters launched a version which automatically matched buy
and sell orders from anonymous dealers. Nowadays, dealers ex-
change over $4 trillion-worth of foreign currency a day, the bulk
of it over two electronic systems. One concentrates on transac-
tions in dollars and Japanese yen, the other on sterling, the euro
and the currencies of emerging markets.