How Technology Has Changed Forex Trading Over Time

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Arguably, the Internet has emerged as one of the most ground-breaking and disruptive technologies in the history of mankind. After all, this has changed everything from the way that we shop to the channel that we use to access music, while it has also altered the nature of social interactions beyond all recognition.

Not only this, but technology has also changed the nature of financial market investment, particularly in real-time, liquid entities such as the foreign exchange. We have witnessed the emergence of live, virtual trading during the last 15 years, for example, while advanced algorithms and supercomputers are now also being used to trigger a high volume of orders within a short space of time. 

The Emergence of Technology in the Forex Market

This evolution actually began in the early 1980s, during which time stock exchanges launched primitive, electronic trading platforms that enabled investors to place orders remotely and across a dedicated network. While these platforms were extremely popular in fast-paced and volatile markets such as foreign exchange, however, they did not offer traders access to live price points or execute orders in real-time.

In fact, it was not until the emergence of the Internet during the early 1990s that these trading systems evolved to include live market prices, complex algorithms and real-time order execution. These were still largely exclusive to brokers and the those who worked within various stock exchanges, however, so the rest of the decade was dedicated to refining the underlying technology and creating portals that could be easily accessed online. This process continued in earnest between 2001 and 2005, driving the proliferation of dedicated, online trading platforms that brought access to the forex market outside of established stock exchanges.

The Last 15 Years: Mobile and High-frequency Trading

While the evolution that we saw during these 25 years was gradual rather than seismic, the same cannot be said for the changes that we have seen since. After all, the emergence of online platforms has also laid the foundation for mobile trading during the course of the last decade, with sophisticated apps such as the Metatrader range enabling investors to access their forex accounts at any time (and often without a viable Internet connection). This has improved the accuracy of forex trades and strategies, particularly for those with a short-term outlook and a penchant for day trading.

We have also seen other, more recent developments in the forex market, some of which may be considered as being controversial. As the algorithms initially associated with the market’s primitive trading systems have evolved in line with technological advancement, for example, so too they have become immensely powerful and capable of executing successful traders without human interaction. This has led to the development of dedicated supercomputers capable of driving high-frequency trading (HFT), through which a high volume of trades are executed within an exceptionally short period of time.

To put this in perspective, electronic dealing will account for an estimated 76% of all currency transactions in four years time, with an increasingly high proportion of these completed as part of a HFT strategy.

Developers of the technology will claim that this is a safer way of trading as it eliminates potentially damaging human elements such as emotion, of course, but there is evidence that a sudden surge of transactions actively destabilises an already volatile marketplace and makes it exceptionally difficult for human investors to manage risk and optimise their returns.

The Last Word

There is an old adage which suggests that the precise impact of technology depends on how it utilised, and there is no doubt that the development of HFT programs has the potential to undermine the forex market in the future. Stringent regulations therefore hold the key to maintaining the market’s equilibrium, as forex traders look to strike a balance between leveraging the technological revolution that has engulfed them and creating a relatively stable trading environment.

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Student @ Advanced Digital Sciences Center, Singapore. Travelled to 30+ countries, passion for basketball.