How SaaS has revolutionized FX trading 30 years on from Black Wednesday

By Vikas Srivastava, Chief Revenue Officer, Integral

Doesn’t time fly in the world of FX. It is hard to believe, but this month marks the 30th anniversary of the UK crashing out of the Exchange Rate Mechanism (ERM). Infamously dubbed Black Wednesday, the event took place on September 16, 1992, when the government was forced to withdraw sterling from the ERM after an unsuccessful attempt to keep the pound above the lower currency exchange limit mandated by the European Union.

Estimates of the costs vary – but the consensus is around £3 billion (in terms of cost to the UK treasury). For a brief period, interest rates shot up to as high as 14% and the chancellor, Norman Lamont, authorized the spending of billions of pounds of FX reserves to buy up sterling being sold on the currency markets. But amid all the carnage and chaos surrounding the value of the pound at the time, it is worth remembering that most FX traders at the time were still writing down buy and sell orders on paper. A far cry from today’s tech driven market where financial institutions benefit from greater efficiencies, faster access to liquidity pools, tighter spreads, and better prices in a cloud-based environment. This begs the question, what are the differences between trading FX in the SaaS fuelled world of today, in comparison to three decades ago?

If trading firms today had been embroiled in Black Wednesday, then they would have been able to manage the situation very differently – particularly as a lot of FX trading these days is carried out electronically. Firms would have been able to react to market changes immediately through active risk management and dynamic price generation. Why? Because cloud is synonymous with agility and flexibility. From a macro perspective, cloud can act as a democratizing force for firms operating across the spectrum of FX globally. Our research shows that over a quarter (28%) of global financial institutions expect their FX trading workflow to be entirely cloud-based in the next five years, and an additional 41% of respondents expect a hybrid arrangement within five years. This means that by 2026, more than two thirds of the heads of FX trading and senior FX managers we surveyed expect their trading workflows to use cloud technology. It’s not hard to see why so many view SaaS as a strategic next step for their FX business.

The breakthrough of Software-as-a-Service (SaaS) in FX has no doubt given financial institutions greater capacity to deal with the impact of shock macro events, such as Black Wednesday. Looking ahead, expect to see more developments on cloud over the coming years. It will be with these technology providers that FX market participants can gain the edge, modernizing and growing their business along the way, regardless of what the next big event to hit FX markets might be.