Foreign Exchange trading that started as the first and prime tool that created our banking industry has now grown up to an estimated 2 trillion US$ daily franchise. No other product equals this size. Many of the senior traders in the markets have all started with this simplest of product: you buy low and you sell high, or the reverse. Are things that simple or do we need to look at other factors? Are the flows between different currencies that should be the basis for transfers from one currency to another still dominating? Or is the proportion more like 10% for real business flows and 90% speculation, or worse?

For those long enough in our business, prior to electronic trading, the currency crisis of the ERM when the UK was humiliated is a good reminder of strong forces in the currency markets that have jeopardised many central bankers and careers of Ministers of Finance. And what do we see today, huge movements in commodity prices, the recent fall out in the Carbon credit area, the drop in the Icelandic Krona value who is behind all this? Are we once again loosing touch with reality?

Hedge funds you may say? After two dismal years the hedge fund industry is booming, with growth between 4 to 8% and even retail issues of 2 Billion US$ being marketed in order to increase the availability of capital. The hedge fund industry is even involved in mergers and acquisitions, big companies have come under attack, board members have been forced to resign. And all this because the masses of money under management have to be profitable so the promised returns to the investors can be delivered and big management fees can be paid to those in control.

So who is behind that incredible volume, and who is controlling it? Are we heading for yet another disaster that the tax payer will need to bail out?

The prime brokerage model certainly has allowed more non-banks to participate. Never has the market seen more participants, both as price takers and increasingly also as providers. The coming of age of electronic trading systems has made this market transparent. The changes are even being felt by individuals/ small investors who can now play the game through preferred internet connections. And the banking industry is willing to provide those facilities.

If all these people are making money, who is footing the bill? One can hear that interbank platforms are losing money, one reason why there is less proprietary trading in the dealing rooms of this world. The interbank market is dominated by a few very large players who are in close contact with the hedge fund industry.

The relationship between this client base and the very active banks in foreign exchange is highly important. At the same time when electronic trading is advocating transparency, understanding the needs of your major clients and being able to read the flows has become top game.

So can one order move the market? Certainly not in the major markets like Euro, US$ and Yen. But smaller currencies can be under threat when people similar to Soros see that the fundamentals will support the trade. And if a number of large currency funds think the same way, a little spark can ignite a firework. The large imbalances of trade will be corrected. And while the hedge fund industry is providing ample liquidity into the foreign exchange market these flows will steer the government, the guardians on the local currency into submission and redirection of economic policy.

One might say that hedge funds are becoming the gamekeepers. So where are the poachers? Where does this leave the regulators and central banks? Price stability and reflection of the true value of a currency are important. Even more important is understanding what drives the currency markets. By creating the possibility of an open dialogue with the banks through the foreign exchange committees in the major currency centres, officials at Central Banks try to understand the markets. An open dialogue will quickly explain what is the cause of sudden movements. Long gone are the days of open intervention in the foreign exchange markets. In this trillion dollar market no intervention on the foreign exchange markets alone can be successful. But in carefully nurturing relations between the policy markers, the politicians and the industry, this successful business by the industry including the hedge funds could continue.