High-Tech Global Trading Overpowers Central Banks
Sullivan, Robert S., Srivastava, Sanjay, American Banker
Europe's currency chaos reflects the revolutionary impact that technology has had on financial trading.
Central banks used to control exchange rates, either by influencing interest rates or by direct intervention. Sometimes even the threat of intervention was sufficient, especially when supported by other central banks.
First, there is the sheer size of the market. Technology has created a global market so large that it is impossible for a central bank to artificially maintain an exchange rate. A large intervention, say $5 billion, pales in comparison to the more than $700 billion traded every day in the currency markets.
In fact, the reserves of most central banks together are insufficient for prolonged intervention in the currency markets, even jointly.
The integration and unification of the currency markets is a direct result of technological advances that allow participants anywhere not only to have access to market information but also to easily move large amounts of money across national boundaries.
This results partly from recent improvements and automation in settlement and clearing.
Second, telecommunications technology has made information readily available. Almost any significant event around the world is now reflected instantly in the markets.
All this is helped by a quantum leap in analytical technology. This consists of using sophisticated math to analyze and respond to information.
The central role of analytical technology in today's markets has been recognized by financial and academic institutions, many of which devote considerable resources toward the development of this technology.
An example is the financial analysis and security trading program (Fast) at Carnegie Mellon University, set up with banking and computer-industry partners.
It is now possible to react instantly to information or events and to find and take advantage of opportunities wherever they occur. …