Every day, traders, investors, and speculators exchange currencies worth more than $5.1 trillion. In the past ten years, the volumes of these transactions have increased, fueled by improved technologies and increased exposure especially in the developing countries.
It was not always like that.
In the past, forex trading was a reserve to large institutions like banks and hedge funds in the developed countries. These institutions had the require software and hardware – which costed thousands of dollars – and the capital to trade.
The Forex trading industry started to emerge in 1875 when the world turned to the gold standard. During that time, companies doing international trade used gold and silver to exchange goods. This was difficult because the price of gold and silver fluctuated depending on the demand and supply.
So, countries developed the gold standard which backed each currency by gold.
The gold standard developed issues during the World War 1 when Germany wanted funds to develop its military. The amount of money needed was so much that gold was not enough to back the currency. So, the gold standard failed.
After the second world war, countries met at Brenton Woods in New Hampshire and agreed to create a method of fixed exchange rates, the creation of the IMF, International Bank for Reconstruction and Development, and the General Agreement on Tariffs and Trade (GATT). They also accepted replacing the dollar with the gold standard.
The Brenton Woods agreement ended 25 years later when the amount of USD reserves was so low. President Richard Nixon decided to end the exchange of USD to gold. This led to a surge in gold prices as countries rushed to acquire more.
After the end of the Brenton Woods Agreement, world leaders met in Jamaica and created the Jamaica Agreement in 1976. The agreement agreed to fix the BWA by letting governments decide their monetary future. Governments adopted dollarization, pegged rate, or the managed floating rate.
In dollarization, countries decide not to issue their own currencies and instead use the dollar as their national currency. In pegged rates, countries peg their currencies to the dollar or any currency while it managed floating rates, governments accept the currency to fluctuate according to demand and supply.
The present foreign exchange happens because of the latter method, where currencies are allowed to move up and down because of demand and supply.
In the past, trading in currencies was a reserve of large institutions and governments. For ordinary traders, it was only possible when converting currencies to other currencies. In this, they had to be physically present to exchange the currencies.
For large institutions, the technology to analyze currencies and trade was already there. For example, the British Pound is known as the cable because of the wired cable that moved from London to New York. These technologies were affordable to large investors.
Starting from the late 90s, technology trading became decentralized with the birth of new technologies. Our companies, among others in the industry pioneered technologies that were affordable and available to traders from around the world. Contrary to the past when people needed thousands of dollars to trade, today anyone with as little as $200 can start trading.
The technology continued advancing with the introduction of mobile applications that allowed people to trade anywhere and at any time. In the past year, technology is leading to the cryptocurrencies market with digital currencies like bitcoin and Ethereum taking over the world.