Major advances in technology, making
possible instantaneous real-time transmission of
vast amounts of market information worldwide,
immediate and sophisticated manipulation of
that information to identify and exploit market
opportunities,and rapid and reliable execution of
financial transactions—all occurring with a level
of efficiency and reduced costs not dreamed
possible a generation earlier.
Breakthroughs in the theory and practice of
finance, resulting not only in the development
of innovative new financial instruments and
derivative products, but also in advances in
thinking that have changed our understanding
of the financial system and our techniques for
operating within it.
The common theme underlying all of these
developments is the role of markets—the growth
and development of markets, enhanced freedom
and competition in markets, improvements in the
efficiency of markets,increased reliance on market
forces and mechanisms, and the creation of better
market techniques and instruments.
The interplay of these forces, feeding off each
other in a dynamic and synergistic way, created a
global environment of creativity and ferment. In
the 1970s, exchange rates became more volatile
and imbalances in international payments grew
much larger for well-known reasons: the advent of
a floating exchange rate system, deregulation,
and major macroeconomic shifts in the world
economy. That caused financing needs to
expand, which—at a time of rapid technological
advance—provided fertile ground for the
development of new financial products and
mechanisms. These innovations helped market
participants circumvent existing controls and
encouraged further moves toward deregulation,
which led to additional new products, facilitated
the financing of still larger imbalances, and
encouraged a trend toward institutionalization
of savings and diversification of investment.
Financial markets grew progressively larger and
more sophisticated, integrated, and efficient.
In that environment, foreign exchange trading
increased rapidly and changed intrinsically.
The market has expanded from one of banks to
one in which many other kinds of financial and
non-financial institutions also participate—
including nonfinancial corporations, investment
firms, pension funds, and hedge funds. Its
focus has broadened from servicing importers
and exporters to handling the vast amounts of
overseas investment and other capital flows that
currently take place. It has evolved from a series
of loosely connected national financial centers to
a single integrated international market that
plays a far more extensive and direct role in our
economies, affecting all aspects of our lives and
our prosperity.
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