The Evolution of the Forex Market

In the current lesson we will be discussing a bit about how the FX market evolved in recent years.

Before 1996, the only groups that were able to trade forex were large financial institutions, central banks, corporations, governments hedge funds and extremely wealthy individuals. 

It was very difficult to take part in the forex market because you needed much larger balances than you need today in order to make any decent profit. 

In order to profit from fluctuating exchange rates, you had to create multiple bank accounts, each one denominated in a different currency and transfer funds from one account to another. Even that practice could be cumbersome as the conversion process could take up to three working days for the FX transaction to clear. It’s obvious that in the FX market a lot could happen in three days, with profitable positions possibly switching to losing ones. In some countries you needed a special permit by the government to convert local currency into foreign exchange. Even if the transaction did take place, usually the bank which made the transaction would charge a high fee for its services, thus reducing any profit made. Also, the flow of information was not hassle free. You needed international financial press at the time which may have required a couple of working days to get. Thus, by the time you reacted to certain events, the market (reaction) would have already changed.  

In 1996, forex trading started becoming more practical and more accessible to individuals due to the development of internet-based trading and the ability to trade on a margin. The gradual increase of capacity for PCs enabled practically instant trading.

You can now trade currencies in a matter of seconds, with just a click of your mouse and by committing only a small percentage of the amount you want to invest.