Understanding the History of the Forex Market
The Bretton Woods monetary system refers to the post-World War II international monetary system centered around the U.S. dollar. The General Agreement on Tariffs and Trade (GATT), as a supplement to the 1944 Bretton Woods Conference, along with the agreements reached during the conference, are collectively known as the "Bretton Woods System."
This system was a multilateral economic framework based on currency liberalization, capital liberalization, and trade liberalization, forming the core of the capitalist bloc. It was designed according to U.S. principles to establish American economic hegemony. The Bretton Woods System facilitated the post-war recovery and growth of the global capitalist economy. However, due to frequent dollar crises, U.S. economic downturns, and inherent systemic contradictions, the system collapsed in 1973 and was replaced by a floating exchange rate regime.
Initially, determining fair exchange rates was challenging, but advancements in technology and communication made it easier. In the 1990s, with the rise of computers and the internet, banks began developing their own trading platforms to provide clients with real-time quotes for seamless transactions.
Meanwhile, commercially savvy marketing firms introduced internet-based trading platforms for individual traders. These firms, known as "retail forex brokers," made it possible for individuals to trade forex in smaller volumes. Unlike the interbank forex market, where one standard lot equals 1 million units, retail brokers allowed traders to trade as little as 1,000 units.
Retail Forex Brokers
In the past, only large speculators and well-capitalized investment funds could trade currencies. Thanks to retail forex brokers and the internet, currency trading became accessible to the general public.
With no barriers to entry, anyone could sign a contract with a forex broker, open an account, and start trading. Brokers primarily operate in two forms:
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Market Makers: These firms set their own bid and ask prices for forex.
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Electronic Communication Networks (ECNs): ECNs use the best available prices from interbank market participants.
Market Makers
Suppose you plan to visit France for escargot. To prepare, you exchange your local currency for euros at a bank or forex kiosk. As your counterparty, the bank offers a fixed exchange rate, and like all commercial transactions, there is a bid-ask spread.
For example, if a bank's EUR/USD bid price is 1.2000 and its ask price is 1.2002, the spread is 0.0002. While seemingly small, this spread generates substantial profits for market makers handling millions of trades daily. Market makers are the backbone of forex liquidity. Retail market makers repackage large contracts from wholesale providers into smaller lots, enabling individuals to trade. Without them, retail traders would struggle to participate.
ECNs
An ECN is a trading platform that automatically matches client orders at specified prices, sourced from multiple market makers, banks, and other ECN users. Orders are executed at the best available price.
Since ECN brokers allow traders to set their own prices, they typically charge minimal commissions. Tighter spreads and lower fees make ECNs a cost-effective option.
Of course, this is just a glimpse into the forex market. As we’ve discussed, timing is crucial in trading—so, do you know when you should trade?
