Trading
How currency marketplaces have changed foreign currency trading forever
Global Banking & Finance Review®
Company
By Ola Oyetayo, co-Founder of Verto
Companies expanding globally, from large multinationals to small businesses, often encounter significant challenges when dealing with exotic or thinly traded currencies. These obstacles include limited exchange rate control, high initial expenses, and operational inefficiencies. A key issue is the scarcity of liquidity and price transparency, especially for emerging market currencies.
Although the emerging currency market is expected to grow at a 6.5% CAGR over the next five years, exotic currency trading remains limited, intensifying liquidity constraints and trading expenses.
However, the emergence of currency marketplaces has transformed foreign currency access and trading, offering an effective solution to forex liquidity challenges. Here we’ll look at how these innovative platforms are reshaping the global currency landscape, enabling businesses to tap into deep liquidity pools for illiquid and exotic African currencies.
The challenges of liquidity
Industries engaged in international trade, cross-border investments and global supply chains are often most heavily impacted by FX liquidity challenges. Limited market depth and fragmented liquidity sources complicate currency transactions, leading to suboptimal pricing and execution strategies for exotic currencies. These issues also increase settlement and counterparty risks, particularly when trading through traditional banking channels.
Take, for example, the CEO of a sustainable agriculture company expanding into Africa. They face complex challenges related to cross-border payments for importing equipment and exporting produce. The CEO is concerned about the associated costs and complexities.
But with currency marketplaces like Verto, which are integrated with global financial systems, a company will have access to deeper liquidity pools. This translates to more available funds and better credit facilities at competitive rates.
For our CEO, leveraging these liquidity pools means they have improved capacity to manage large transactions efficiently without facing delays or prohibitive banking charges. This access ensures more stable and predictable costs, directly improving company budgets and facilitating smoother expansion into African markets.
Getting a competitive edge with price controls
Traditional financial institutions often burden businesses trading across borders with high upfront costs and hidden fees – particularly when dealing with exotic, illiquid currencies. In contrast, modern currency marketplaces offer greater transparency and flexibility, allowing businesses to explore potential deals with minimal commitment and secure optimal rates without significant risk.
One example is a treasurer at a multinational bank with operations across Africa. He grapples with the inefficiencies and high costs of traditional cross-border payment methods, seeking a solution that offers fast processing times, low fees, and enhanced visibility.
By using a currency marketplace, such as Verto’s platform, the bank can maintain strong business relationships and bolster its competitive position in the African market, overcoming the hurdles associated with exotic currency trading.
Giving companies more autonomy
Currency marketplaces allow businesses to connect directly with currency-supply sources, eliminating intermediaries and streamlining the exchange process. This direct approach makes for more transparency and efficiency, giving companies the capacity to trade at preferred rates and manage transactions on their own terms.
As an illustration, imagine the CEO of a UK-based energy company with subsidiaries across Africa. The CEO faces challenges related to cross-border payments, including currency exchange risks, regulatory compliance, and transfer delays.
Marketplaces can offer real-time transactions and streamlined processes, as well as transparent pricing, fast processing times, and seamless integration with existing financial systems. This allows our CEO (in this example) to boost profits, support initiatives to expand the business, and ensure compliance with regulatory standards across Africa.
By using Verto’s marketplace then, the energy company can efficiently manage currency exchanges for both common G10 and exotic currencies like XOF, XAF, GHS, NGN, KES, and UGX. This direct access enables quicker responses to market demands and more effective financial management across the company’s diverse African operations.
A leap forward
Modern currency marketplaces prioritise transaction security through rigorous know-your-customer (KYC) and anti-money-laundering verifications (AML), creating a safe trading environment. For example, an agency managing student placements across African universities, handling sensitive tuition fee transfers in multiple currencies, would benefit greatly from these robust security measures.
These marketplaces offer comprehensive identity checks and AML verifications, ensuring transaction safety for such agencies. By addressing common currency trading challenges with innovative, user-friendly solutions, these platforms have become indispensable tools for global financial market participants. They not only streamline operations but also deliver a secure, efficient, and profitable environment for diverse currency trading. This development represents a significant leap forward in the evolution of foreign exchange trading, particularly for those dealing with exotic African currencies.
Foreign currency trading, or forex trading, involves buying and selling currencies on the foreign exchange market to profit from changes in exchange rates.
Liquidity refers to how easily an asset can be converted into cash without affecting its market price. High liquidity means assets can be quickly sold.
Price transparency refers to the availability of clear and accessible pricing information, allowing buyers and sellers to make informed decisions.
Liquidity pools are reserves of assets that provide liquidity to traders, ensuring that transactions can be executed quickly and efficiently.
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