Origin of the Currency Exchange Market

Forex trading has a pretty long history and could be traced back to the ancient Middle Ages when foreign exchange just started out as international merchant bankers devised bills of exchange. Those could be transferred to a third-party, allowing flexibility and growth in foreign exchange dealings.

The modern FX market is varying with periods of high volatility and relative stability. By the mid-1930s, London became known as the leading center for the foreign exchange, and the British pound served as the benchmark currency to trade and was kept as a reserve currency.

After the World War II, when the British economy was decimated, and the United States was the only developed country relatively unscathed by war, the US dollar ($) became the reserve currency for the majority of countries. In turn, the US dollar was pegged to gold at $35 per ounce. Thus, the US dollar became the world's reserve currency.

At the end of the 70s, the free-floating of currencies was officially mandated. That became the most important landmark in the history of financial markets in the XX century and has led to the formation of Forex in its contemporary understanding. That is, the currency may be traded by anybody and its value is a function of the current supply and demand forces in the market, and there are no specific intervention points that have to be observed. Foreign exchange has experienced spectacular growth in volume ever since currencies were allowed to float freely against each other. While the daily turnover in 1977 was $5 billion, it increased to $600 billion in 1987, reached the $1 trillion mark in September 1992, and stabilized at around $5 trillion in 2010s.

The main factors of influence on this amazing growth in volume are mentioned below. A significant role belonged to the increased volatility of currency rates, growing mutual influence of different economies on the interest rates established by central banks, which essentially affect the currency exchange rates, more intense competition on commodity markets and, at the same time, amalgamation of the corporations of different countries, technological revolution in the sphere of the currency trading. The latter manifested in the development of automated dealing systems and the transition to the currency trading by means of the Internet. In addition to the dealing systems, matching systems simultaneously connect millions of traders around the world, electronically duplicating the brokers' market.

Advances in technology, computer software, and telecommunications and increased experience have raised the level of traders' sophistication, their ability to both generate profits and properly handle the exchange risks. Consequently, trading sophistication has led toward volume increase.