efore World War I, most central banks maintained their currencies through convertibility into gold.
It was possible that NOTES could also be exchanged for gold. However, for this type of gold exchange, it was not necessary to have a Central Bank to fully cover the government’s foreign exchange reserves.
In order to protect local national interests, they started controlling the exchange of currencies. This prevented the impact of market forces resulting from monetary irresponsibility.
Towards the end of World War II, in July 1944, the Bretton Woods Agreement was reached at the initiative of the United States.
During the conference, held in Bretton Wood, New Hampshire, the proposal of John Maynard Keynes’ to create a new world reserve currency system based on the US dollar was rejected.
Instead, they signed the agreement to set the exchange rate of the US dollar against gold. Which allowed all other currencies to be pegged against the US dollar.
During the same period were established some international institutions such as the International Monetary Fund and the World Bank.
The countries that were winning World War II started looking for a way to avoid the destabilizing monetary crises that the war led to. As a result of the Bretton Woods Agreement, a system of fixed exchange rates was created, which partially restored the Gold Standard. It fixed the US dollar at $ 35 an ounce of gold and pegged other major currencies to the dollar.
As emerging economies moved in different directions in the 1960s, the Bretton Woods system came under constant pressure.
In 1971 the Bretton Woods Agreement was abolished and replaced by a different currency valuation system.
The currency market evolved into a free-floating one, where exchange rates were determined by supply and demand.
After that the 1990s came, the boom of computers and the creation of the Internet changed everything drastically.
Internet banks began creating their own trading platforms, which started streaming live quotes to their clients so they can trade at the exact moment.
Then the trading platforms for individual traders came along, also known as “retail forex brokers”.
Retail Forex Brokers
Before the appearance of retail forex brokers only highly capitalized investment funds could trade currencies.
Nowadays, anyone can trade as long as he/she contacts a broker, open up an account and deposit some money. Then, if you have the skills to trade you will sit on the sofa and see how the numbers are adding up in your account balance.
Brokers basically come in two forms:
Market makers – they set their own bid and ask prices themselves
Electronic Communications Networks (ECN) – they use the best bid and ask prices available to them from different institutions on the interbank market.
Let us explain to you a bit more about these market makers and how they profit.
You know there is always a catch. In this case, it comes in the form of the bid/ask spread.
For instance, if the bank’s buying price (bid) for EUR/USD is 1.2000, and their selling price (ask) is 1.2002, then the bid/ask spread is 0.0002.
At first sight, this profit looks like nothing to profit from, but imagine millions of these forex transactions every day, it does add up to create a huge profit for the market makers!
They basically provide liquidity by “repackaging” large contract sizes from wholesalers into bite-size pieces.
It is like this saying, which women tell when they are angry with their husbands – “You can’t live without them, but this doesn’t make them less evil or lovable. “
Electronic Communications Network
Electronic Communication Network is the name given for trading platforms that automatically match customer’s buy and sell orders at stated prices, which are gathered from different market makers, banks, and even other traders who use the ECN.
Whenever a certain sell or buy order is made, it is matched up to the best bid/ask price out there.
ECN brokers typically charge a VERY small commission for the trades you take.
Ok, that’s enough tales for the week. Let’s move on the practical side and teach you some more about trading.