October 14, 2002
I'll be honest and acknowledge I don't fully understand the foreign exchange arena. However, I have been doing a lot of research recently and developments in foreign exchange trading are about to spark a major excrement storm in financial circles. And the huddled masses may or may not ever hear of it.
According to Dr. Richard Olsen, Chairman of Olsen and Associates, in Zurich, Switzerland, "The foreign exchange market, with a daily transaction volume of 1.5 trillion USD" (yes that is not a typo....one and a half TRILLION DOLLARS), "is 50 times larger than all the equity markets combined and is essentially controlled by only ten or so major banks. Typically, every trade is for one million USD or more, much larger than in any other market. Smaller trades are aggregated."
Olsen asks "How is it possible that this huge market has remained the fiefdom of the large investors and traders?" Hey Doc, it's the 'Golden Rule': The guys with the gold make the rules.
Ever since the United States bailed on the Gold Standard in 1971 only the large financial institutions and big league investors were allowed to exploit the massive foreign exchange currency market ($1.5-TRILLION per day IS massive by even Warren Buffet standards). This very exclusive big boys club has been jealously guarded and maintained by the financial elite.
Olsen and others are expecting (and hoping) the Internet and technology will change that.
"It is estimated that the FX market will grow within a few years from a transaction volume of 1.5 trillion USD per day to 10 trillion and will be fully automated, transacting currencies at a minuscule spread of 0.01 percent and lower." says Olsen.
Candidly, a lot of this high finance minute-by-minute analysis is still over my head. Like most of you, my major financial concerns are the mortgage and saving for son's college education. However, in talking with the founders of a new automated online trading club, it is clear there will be consequences, intended and otherwise.
One of the more intriguing aspects of online currency trading is the practice of "continuous" interest payments. Directors at www.FXTrade.com claim it will become the norm and competition will compel large institutions to also provide "continuous interest". Maybe....maybe not.
The concept and practice will prove to be a blessing and a curse. Sure investors/traders at all levels will benefit significantly. However, the suggestion that other venues (especially the financial elite) will anxiously copy or be compelled to adopt continuous interest may prove to be wishful thinking.
Reportedly only FXTrade.com and strategic partner Oanda.com offer continuous interest. Banks and financial institutions may be pressured into providing continuous interest...but don't expect the big boys to anxiously embrace an accounting practice that will cost them billions. They will fight...youdamnbetcha!
If you think the Internet was challenged by frustrated Clintonistas intent on bridling the First Amendment you ain't seen nothing until the Rockefellers, Morgans, and Rothchilds wade into the fray.
Last year the big buzz was all about day traders. Until I spoke to the founders of FXTrade.com and read Dr. Olsen's work FX used to mean special effects in movies. However, if day trading was the first automobile, then FX is a Lamborghini on steroids. I may not know "Jack" but the site IS slick.
In attempting to understand what has been, what is, and what might be, I resorted to the military practice of a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats). There were a lot of strengths, few but significant weaknesses, huge opportunities, and threats, which may prove legion.
One-point-five TRILLION-dollars a day is humongous. The financial elite is not going to go quietly into the night. Two or three small online trading platforms are not going to crash the global financial leviathans. The institutional elite may allow small innovators to flourish and accept the relatively minor losses as the cost of doing business. However, if the perceived threat of being compelled to offer continuous interest gets traction....Katie bar the door!
The longer banks get to hold on to money, the more interest THEY realize.
Dr. Olsen explains, "Incremental interest rate payments: Interest rate payments will be made at hourly increments and later at higher frequencies. In the traditional foreign exchange market, investors can only take advantage of the interest rate premium if they keep their funds invested in the respective currency overnight. With Oanda, they can take advantage of any interest rate premiums during the course of one hour. These intraday interest rate payments lower the threshold for getting investors to buy a currency that has a sales overhang, which will make Oanda attractive to countries whose currencies are under pressure. The payment frequency will also be attractive to corporate treasurers, who know that pennies add up."
Keep an eye on this. As Matt Drudge often notes....DEVELOPING....
© 2002 Geoff Metcalf - All Rights Reserved
Geoff is a veteran media performer. He has had an eclectic professional background covering a wide spectrum of radio, television, magazine, and newspapers. A former Green Beret and retired Army officer he is in great demand as a speaker. Metcalf has hosted his radio talk show on the ABC/Disney owned and operated KSFO and in worldwide syndication. www.geoffmetcalf.com