Evolution of forex market (history)

It was during the middle ages when Forex market started and by then currencies were only traded through the international banks.

Before 1875, countries commonly used gold and silver as a means of international payments but eventually they started bringing their own currencies to the market though they were required to change it back to gold.

After the world war II, economies in Europe, America and Asia were left in chaos and economic instability and so they decided to come up with an agreement to fix their economies.

“The Bretton Woods Agreement (1944).” This was meant to stabilize the global economy by preventing free exchange of money across nations. In order to stabilize and regulate the international forex market, all participating countries agreed to try and maintain the value of their currencies by fixing it against the dollar which was also fixed on the value of gold.

The Bretton Wood fixed the values of all  national currencies against the US Dollar and set the Dollar at a rate of 35 USD per ounce of gold. This was to stop fluctuations in exchange prices between currencies and stabilize the global economy. It also stopped manipulation of currencies where countries were previously adopting policies to try and gain the upper hand in the market.  The  increasing demand for USD could not balance with the supply of gold to maintain the liquidity for the world market and so this resulted to the slow down of the global economy.

In 1971 the Bretton Woods Accord failed, however it managed to stabilize major economies of the world, including those of the western governments and the modern foreign currency exchange evolved. With the free floating exchange, rates were determined by the forces of demand and supply.

The buying and selling activities of all market participants around the world determined the free floating currency value.

Traders could capitalize the fluctuating rates by entering a forex trade at the right time otherwise they would lose their money. Prices were floated daily with volumes speed and volatility throughout. More so  new financial instruments, market regulations and trade liberalization also merged in the forex market.

Meanwhile the modern forex market quickly accelerated at a steady growth due to the advancement of technology and the use of computers. Currency trading rose from about 70 billion a day in the 1980’s to 5.3 trillion daily in less than 40 years.

Before the development of forex trading platforms and internet in 1990s, free floating currency was mostly traded by banks, hedge funds and large commercial companies. Due to the technology breakthroughs, and expansion of the internet, individual traders started accessing the global currency/forex market.

It was also majorly the development of the internet, trading software, and forex brokers that made it easy for traders to buy and sell currencies on margins with the market markers. This eventually enhanced the development of retail trading.

The retail  trading in the forex market.

 This is a small segment of large foreign exchange market where individuals  use the electronic platform to speculate on the exchange rates of different currencies. Retail trading is composed of; market makers, brokers and the electronic communication network. These are only different on the way they provide currency rates to traders.

Market makers.

 The market makers are the big fish in the currency/forex market, these can be compared to wholesalers in our normal markets or dealers in the telecom markets. They actually make the market.

The market makers are always there to buy or sell at any time of the trading session, therefore operate throughout  the entire trading day with firm bid and ask prices and are capable of making the market for a stock even when there are no interested buyers or sellers.

They may be also considered as fundamental building blocks of the foreign exchange market because they basically provide liquidity. They are able to satisfy high volumes of market orders in a matter of a second at a competitive price. Without them there is no market. Mostly are banks and brokerage firms.

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