Definitions
- Launch of Interbank Foreign Exchange Market
- The purpose of Interbank Foreign Exchange Market
- Development of Forex brokers and ECN
Launch of Interbank Foreign Exchange Market
Interbank FX trading started in 1971 when US President Richard Nixon finally terminated gold convertibility of US dollar.
GBP/USD, which still is very popular for speculation in the foreign exchange market, became the first freely float pair.
The purpose of Interbank Foreign Exchange Market
In the first 20 years of existence currency trading was not of particular interest to investors and private traders, so the main activity of foreign exchange transactions took place between private and commercial banks.
Speculative activities of George Soros’s fund for weakening of a rate of the British pound against German mark (GBP/DEM) in 1992 became a revolution of currency trading.
As a result of committed transactions, George Soros’s fund earned more than $ 1 billion in two weeks.
The case of so fast and highly profitable earnings defined origin of interest to the private trading in the foreign exchange market.
But only several could become traders, because banks were as brokers, and deposit should be at least 1 million base units.
If the trader didn’t have a million dollars, he couldn’t get access to interbank liquidity.
Development of Forex brokers and ECN
Over time the number of people interested to learn the profession of speculator increased, and in the middle of 1990 ECN appeared.
It were organizations that collected quotes flows from several banks, generated data in one stream, aggregated liquidity from large customers (investment funds, hedge funds, etc.), and thus provided a better quotation and execution.
To open a trading account in ECN significantly smaller amount than in banks (about $ 100 000 – 200 000) required.
Soon, liquidity providers of the third level appeared – Forex brokers.
They differed from ECN lack of minimal account amount and greater leverage.
The final step in the development of Forex brokers is the appearing of universal hedging systems such as VMS.