Introduction
Foreign exchange markets are a remarkable success story. With the rapid expansion of world trade, increased cross-border investment flows and the arrival of newly liquid, tradable currencies, the worlds largest financial market is a constantly evolving 24/365 digital network that seamlessly ties together the global economy.

Since 1989, global foreign exchange turnover has more than tripled to over $2 trillion per day. According to the October 2005 report of the Foreign Exchange Committees Survey of North American Foreign Exchange Volume, average daily volume in that region totaled $440 billion a remarkable 31.2% increase over October 2004.

There have been bumps along the road -- scandals involving unauthorized trading, fraud, and unprofessional trading practices. But, despite the fact that the OTC forex market is essentially supranational and not proscriptively regulated the ethical character of the currency market is as good as or better than that of any other financial market. The FX market has withstood the dynamic changes of modern markets well. Currency market participants have provided abounding liquidity to other markets, have stimulated the emergence of new technologies, risk approaches, products and services and have ensured a smooth market environment for the greatest boom in cross-border finance that the world has ever seen.

Volumes have grown exponentially. Margins are razor-thin. Liquidity is deep and competition is vigorous. Essentially every enterprise on earth -- from tiny factories to global asset managers -- can obtain the currency they need when and how they need it at transparent prices. These are the attributes of a thriving marketplace.
Impact of electronic trading environment
Electronic trading has done much to make this possible. The currency arena was one of the earliest adopters of electronic messaging and today is arguably the most digital capital market of all. Much of the wholesale bank-to-bank market is entirely electronic, and dealer to client and retail trading is aggressively migrating online either to bilateral standalone platforms or to multi-party networks of various types.

This is almost entirely a good thing; in fact, given todays exploding currency volumes, electronic trading is a sine qua non of a thriving and growing marketplace. But it does raise issues. The same qualities that make e-forex such a success speed, efficiency, flexibility, scalability mean that mistakes or malfeasance can easily expand and multiply.

Leaving aside the operational questions of transactional errors and fat fingered trading, e-forex raises important issues regarding bad trading practice. For example, the introduction of autodealing techniques into the FX interdealer market and other electronic trading venues, together with the rise of prime brokerage services, has raised concerns that unprofessional trading behavior may take place under the cloak of anonymity--undermining the reputation of the foreign exchange market and impeding its successful self-policing.

Traditionally, almost all FX transactions have been manually initiated by an individual trader. But over the past 18 months or so, the FX market has witnessed the rapid expansion of automated program trading strategies that facilitate complex, high-frequency trading, risk management, the aggregation and execution of trades and algorithmic and arbitrage trading.

Autodealing has had no discernable impact on overall market liquidity or pricing. The market is still characterized by increasing numbers of counterparties, large numbers of individual quotes and expanding volume and trades at every price point in almost all market conditions.

But concerns have been raised over participants ability to transact automatically on electronic broker platforms through prime brokerage services. In traditional prime brokerage, clients trade in the name of the prime broker but execute their transactions directly with the dealer.

In the electronic prime broker model by contrast, there is no identification of the trade as being prime brokered at the time of execution so the end user is able to trade anonymously. While inappropriate trading techniques can be executed manually, the greater speed and anonymity of autodealing may impede the self-policing capacity of the OTC FX market, with potentially negative implications for its overall risk profile.

Bearing this in mind, and continuing its tradition of forthright identification of potential forex market issues, the Foreign Exchange Committee has established an Autodealing Subcommittee which is reviewing the rise and impact of autodealing, as well as identifying potential risks. This review will build upon earlier work of the Committee which identified more than 20 best practices for the prime brokerage sector.

The same qualities that make e-forex such a success speed, efficiency, flexibility, scalability mean that mistakes or malfeasance can easily expand and multiply.

New FX Market Segments
Todays FX market is witnessing growing trade volumes dedicated to FX as an investable, independent asset class. Many observers have noted that hedge funds and other leveraged investors have introduced new dynamics into the market, as have banks through their use of algorithmic trading. But its also relevant to focus on the role of the new retail aggregators who facilitate electronic FX trading by thousands of individual investors.

Retail foreign exchange traders have gained greater market access through new trading technologies and business models that are delivering price discovery, liquidity, execution, confirmation, and reporting services in near real time. In the foreign exchange distribution channel, transaction services that were historically bundled together and offered by a single provider have been broken out into their components, with specialized entities providing the individualized services.

These innovations may have the effect of separating foreign exchange dealers from retail end users - a development that may complicate the dealers execution of their responsibilities.

Retail aggregators depend on the major foreign exchange market makers as liquidity providers. Many are banks or registered brokers and most are futures commission merchants regulated in the United States by the Commodities Futures Trading Commission (CFTC). As such they must have internal controls, know-your-customer policies and procedures, anti money-laundering programs and independently audited compliance. However not all retail aggregators are registered as regulated entities.

Wholesale foreign exchange dealers need to be aware that they may face significant reputational risk if they are linked to a transaction chain that results in dissatisfaction, litigation or both. Bearing in mind this apparent blurring of the demarcation between the wholesale and retail foreign exchange markets, the Foreign Exchange Committee published a letter to market participants in December 2005 that calls for good legal documentation and stresses the importance of know-your-customer obligations and contractual relationships.

Market-Based Discipline + Supervision = a Healthy FX Marketplace
The foreign exchange market itself is not regulated. That said, the major participants in the market are well-supervised by banking and other authorities. The currency market is, by definition, a transnational market in that 100 per cent of its volume moves across borders.

Imposing a regulatory compliance regime over the whole market would not be practicable and would unavoidably lead to an increased cost of doing business and higher trading and profitability margins, with neg