Foreign exchanges part 2

Immanuel Wallerstein explains that not only bronze and silver currencies but also bills of exchange made possible the settling of transactions within the European economic zone from 1600 up until 1750. Such settlements were sometimes performed through the transfer of gold on the Amsterdam marketplace; multilateral trade in bills of exchange was thereby brought to a conclusion. On the other hand, trade with Asia, the East Indies and Russia was bilaterally based and entailed goods rather than bills of exchange. The coins and precious metals exported to Asia in exchange for pepper and Indian fabrics contributed essentially to money hoarding or jewelry manufacture. This meant barter rather than finance. Today’s foreign exchange (FX) markets are anything but centralized; several hundred currencies are quoted two by two. Currency quotation is performed on a 24 / 7 basis over the counter and by telephone. Transactions between participants are carried out over the phone, through computers or by means of an electronic system. FX is an over-the-counter and bilateral market. That is why it is impelled by market makers who ensure its liquidity. Such two-sided organization may well be bound to change. The CLS bank (which has been under construction for several years) would be ready to serve as the central market maker for foreign exchange for 60 of the largest banks in the world. It would take a similar role to Amsterdam with regard to the other European countries in the eighteenth century. The CLS would consequently replace a chain of atavistic, barter-based exchanges with a multilateral centralized organization.
As of now banks remain the paramount operators on the exchange markets. They take charge of exchange operations on their own behalf and for their customers as well. Since the beginning of the 1990s, non-banking financial institutions have also grown into highly significant operators on the exchange markets. These institutions include the finance and bank-related subsidiaries of the major industrial groups. Along with these branches, institutional investors and great private fortunes have likewise evolved into top-notch economic actors. Fund managers now generally invest overseas so as to ‘‘split the atom’’ of risk and enhance their yields.
Transactions on the foreign exchange market are performed at two levels, the wholesale and the retail markets. The former is an interbank market limited to large international banks that deal with each other and with central banks (when the latter assume a market role) either directly or through the intermediary of brokers. The banks actively intervening are relatively limited in number, 50 to 80 at the very most. These institutions play the part of dealer or market maker. They are permanently present on the market and are able at any moment to propose a buying and selling price for an impressively large number of currencies. Operating alongside these large-scale international financial institutions, banks of lesser importance are quite active but do not continually function as market makers. The second level is that of the retail market in which banks carry on transactions with their customers. The prices of the different currencies are the result of much bilateral bartering. There are several hundred currencies in the world and the price of each of them in relation to each of the others is the result of a chain of ‘‘two-by-two’’ transactions. Of course, the different currencies quoted on the foreign exchange market are not all of equal importance. The dollar constitutes the currency of reference and most transactions on virtually any financial market employ it as such. It nonetheless bears mentioning that the euro to a greater extent and the yen to a lesser extent have taken on a truly international dimension. These currencies are quoted against the dollar in practically all international financial markets.