Financial Doublespeak: Demystifying currency exchange terminology
Our industry sometimes gets caught up in technobabble. This is particularly apparent when attempting to articulate the impact of innovation. Aquarius brings an innovation opportunity for the currency exchange market. Our technology has some specific technical features that will revolutionise and replace the market (and its terminology) as it stands today.
I have outlined the Aquarius impact on four core structural terms/definitions as follows:
Pros: Arbitrageurs help to stabilise price swings and provide liquidity across disparate exchanges that trade the same asset during times of demand shocks.
Cons: Arbitrageurs prosper because they have better information than the rest of the market, can match bids above offers and offers below bids, without taking on any risk. In a perfect market, a buyer and seller should always be able to trade directly with one another.
Outlying factors: Arbitrage opportunities exist in the Forex markets today because the size of the market is too large for any existing single exchange to process the amount of orders. Furthermore, many of these Forex platforms are only accessible by banks.
Summary: An inefficient, fragmented Forex market is very profitable for the few institutions that have access to all of the information.
Our impact: Aquarius has the throughput capabilities to match every buyer and seller in the Forex market, without needing arbitrageurs.
2. Currency Exchange / Open Order Book
Pros: Currency Exchanges operate on every level in our society and usually do not feature an “open order book”. An open order book allows for one person, for example, a European going to the United States on holiday and holding ‘Euros’ to exchange money at the same time and at a “fair price” with an American going to Europe and holding ‘Dollars’. These events are not likely to line up perfectly all the time, and currency exchanges facilitate these exchanges of monies seamlessly.
Cons: Closed order book currency exchanges are essentially arbitrage exchanges where the operators offset any currency exchange immediately at a “non-public exchange” and at a profit.
Outlying Factors: In the past, currency exchanges were a necessary intermediary to help facilitate foreign trade and the occasional foreign traveler. Today’s Forex markets are large and growing.
Summary: Closed order book exchanges are a legacy institution that exist, not only because they are very profitable, but because the volumes are too large to process at any one existing open order book exchange.
Our impact: Aquarius is the only known open order book technology that is capable of matching this volume.
3. Triangulation and Fair Price
Pros: Triangulation is a mathematical methodology of looking at every path to create a better price. For example: A triangulation example could include three separate travelers wishing to change their native country’s currency into the currency of the country to which they are travelling. Bob from the USA wants to travel to Europe and change USD for Euros; Celeste from France wants to travel to Australia and change Euros for AUD, and Bruce from Australia wants to travel to the USA and exchange AUD for USD. In this example, there is not a direct path for any party, yet, through triangulation, they can all receive the currencies they want at a fair price.
Outlying factors: Millions of people travelling simultaneously create potentially billions of paths for triangulation to discover pricing improvements.
Summary: Triangulation not only creates paths to better pricing, but also creates liquidity paths where none existed before.
Our impact: Aquarius is the only known solution that utilises triangulation to achieve better pricing and greater liquidity.
Pros: Liquidity in foreign exchange is the amount of currency that needs or wants to be converted into a different currency. The more liquidity that exists, the better the odds of tightening the bid and offer of any given currency pair (for example: USD/Euro). Open order book exchanges make money by matching as much liquidity as possible.
Cons: Every Exchange has a limitation of throughput (matching liquidity). Too much liquidity will cause them to fail.
Outlying factors: Triangulation further exacerbates the problem of too much liquidity.
Summary: Thousands of currency exchanges exist because a single exchange cannot cope with the demand.
Our impact: Aquarius is the only known solution that can cope not only with existing demand, but the demand further created by utilising triangulation.