Automation and Regulation – The Future of Forex

Putting aside market influences and currency trends, just what does the future of FOREX hold for traders? You need to read this.

The future prospects of any investment market can be incredibly difficult to predict, and the ever-continuing cycle of current events causes volatility that can cause even well-structured market analysis to be written off as total guesswork. As the world’s biggest market with a daily trading volume of $5 trillion (according to the Triennial Central Bank Survey), FOREX is no different, although traders thrive on the relative unpredictability of global currencies. With the coronavirus health emergency, the pending US election, ongoing trade war with China and Brexit to contend with, 2020 certainly looks to be one of the most interesting years in recent history.

Putting aside market influences and currency trends, however, just what does the future of FOREX hold for traders? As is the case for all financial activities, technology is certain to play a central role, but it remains to be seen whether the continued rise of online brokerages and market access in developing nations will have a major effect on the way we trade.

Technology as a catalyst for growth

As the ever-fluctuating currency markets evolve, so too does the technology that traders use to access, analyse and invest in them. According to a 2020 study by JPMorgan, 71% of traders believe that artificial intelligence and machine learning are the strongest contenders for providing deep data analytics for their future trades. Outside of this, the movement towards mobile trading continues to pick up steam as reports of sums in excess of $100 million being staked via mobile apps become more common.

Automated Trading

Technological advancements in the field of AI and the implementation of computer-led data analysis have already started to bear fruit in the form of automatic trading. Major platforms such as FXTM (ForexTime) and eToro now offer copy trading opportunities which enable investors to follow and replicate the signals of the most experienced FOREX veterans in real-time.

In practice, the ability for novices to link their trading accounts to those of the FOREX market’s most accomplished traders illustrates a move towards enhanced accessibility of currency trading. As put by Forbes just three years ago, “FOREX tends to a be a financial topic that seems appealing but out of reach for many”. It is undeniable that FOREX can seem complex for those who are starting out on their investment journey, but the rise of simplified markets such as Coinbase within the cryptocurrency space demonstrate that it is possible to attract and onboard new investors via a less complex approach to trading. Copy-trading could well provide that simplified approach to starting out with FOREX and could lead to an expansion in investor numbers and trading volume by extension.

A Move to Mobile

Outside of a technological revolution in relation to trading analytics and strategy, the seeds of change have already been sown in the way that trades are placed. As reported by Bloomberg, a 2018 study of over 400 institutional FOREX traders indicated that 61% of respondents were “extremely” or “somewhat” likely to use a mobile trading app – almost double the figure from the previous year. There is no doubt that this figure will now have increased further, in part due to the growing agility and functionality of mobile trading platforms.

The transition towards mobile trading is not the only development that investors can expect to see a continuation of in the years to come. As mobile platforms have seen investment and development, so too have their online counterparts. Online Forex brokers such as AvaTrade and FPMarkets further expand the availability of digital trading that can be conducted anytime and anywhere, and it would surprising if the enhanced accessibility of FOREX trading via such sites does not contribute to further growth in trading volume in the near future. These brokerages typically offer access to a wide array of investment opportunities too, with FPMarkets alone facilitating trades in currency, indices, commodities, stocks and crypto. By consolidating these markets across single platforms, there is every possibility that investors could see greater mobility between asset classes and perhaps even the ability to trade across them.

Regulation Restricting Growth

Despite a progression in the technology used to assist and facilitate trading, international regulations have also exerted influence on the FOREX market and the involvement of governments in the practice of investment seems likely to rally in the coming years. This regulatory influence has the dual effect of stemming the growth of retail FOREX as traders attempt to understand the new rules, whilst also formalising the industry, in doing so moving FX closer to becoming a recognised asset class.

The bite of regulation has perhaps been most strongly been felt in Europe, where the European Securities and Markets Authority (ESMA) continues to implement the Markets in Financial Instruments Directive (MIFID II) program. This statutory regulation imposes limits on the leverage of various assets, bans binary options and bonuses and requires negative balance protection from brokers amongst other things. Whilst some fear that these restrictions may cause a decline in the profitability of European accounts, Francesco Riverola, President of FXStreet contends that the regulations will in fact help distinguish brokers for their offerings and “will help traders to pick the right broker for them”. Whilst leverage rules do have the potential to limit trading volume and will affect some currency pairs more than others, for the most part, these regulations appear to be a positive step for FOREX in Europe.

Looking to the future, the Japanese FOREX industry has already struggled against the implementation of leverage restrictions and is now thriving – with the Japanese Times reporting that an estimated 800,000 active accounts were trading in late 2019. With such high numbers of traders, Japan is the world’s largest retail FOREX market and there are some predictions that the Japanese Yen (JAP) could even overtake the US Dollar (USD) for the coveted position of most traded currency. With both nations and currencies facing the prolonged impact of the COVID-19 driven economic crisis, however, it is too soon to make any predictions about the long term movements of popular pairs.

A bright future for FOREX?

There is no doubt that enhanced accessibility to trading is likely to boost the uptake of retail FOREX trading within the coming years. With the advent of copy trading (also known as social trading), currency markets have never been more accessible and online platforms offer a window into what historically has been a relatively impenetrable investment activity.

Elsewhere, the regulation of currency trading may seem to put a negative spin on the markets at first glance yet has the potential to legitimise FOREX into a recognised asset class. Whilst the EU has already taken steps towards regulating market leverage via the MIFID II program, a much harder stance has been taken in some jurisdictions – with China banning FOREX trading outright (with the exception of personal currency exchanges). Whilst these conflicting steps somewhat muddy the waters of the global market, it is worth remembering that China is renowned for currency manipulation and is not necessarily a good indicator of industry sentiments.

With each of these factors in mind the coming years will no doubt display an interesting interplay between the expansion of retail FOREX via online brokers and mobile trading, competing against market contraction spurred on by regulation.

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