The Internet Trade Revolution: Banks Hated It, Speculators Loved It, And The Market Demanded It
Tuesday 2 November 2010
In the 1990s, the currency markets grew more sophisticated and faster because money, and how people viewed and used it, was changing. Bankers and merchants have always sought ways to speed up the movement of money. It meant more security, more flexibility, and more profits. A big leap was made with the invention of the telegraph in the 1800s, which allowed people to wire money within a vast network. This first instance of electronic transfer, however, was not commonly used. After World War II, large numbers of Americans began paying bills with checks rather than with cash. Banks looked for ways to speed up the movement of these payments from the payer to the bank and back to the creditor.
Because sorting and handling bills was relatively inefficient and costly, banks began to turn to a new form of money—electronic. In 1971, the NASDAQ stock exchange opened as a computerized system for selling and buying stocks. By the late 1970s, the banks of the Federal Reserve moved large amounts of money between themselves electronically.
The notion that money was not just a piece of paper, but also something that could assume electronic form, was accepted fitfully by the public. A major advance occurred in 1975, when the government began depositing Social Security checks directly into seniors’ accounts. The growth of credit card use also helped. But it has only been in the past 15 years that the true potential of electronic money has been tapped.
The reason is a vastly improved communication infrastructure that has linked the world in a web of fiber-optic cables. This web carries billions of bits of data at the speed of light. More drastic, however, is that the Internet allows anyone to hook into the vast, humming network of communication. Real-time data and general information take the price-discovery process away from interbank control. An individual sitting alone in his home can find at the click of a button an accurate price that only a few years ago would have required an army of traders, brokers, telephones, and squawk boxes. This is the force behind the growing Forex revolution.
These advances in communication came at a time when the former divisions that separated the world into different parts crumbled.
The Berlin Wall fell, the Soviet Union collapsed, and hundreds of millions of people joined the liberal, capitalist world, led by the U.S. This process—which has been imperfectly called “globalization”—has been monetary, cultural, and social.
For the foreign exchange markets, everything changed. Currencies that previously had been shut off in totalitarian political systems could be traded. Emerging markets such as those in Southeast Asia flourished, attracting capital and currency speculation.
The 1990s were years of enormous economic growth, but they were also rocked by several crises—in Mexico, in Russia, and in Asia. We will look into the circumstances behind these crises, and what a currency investor can learn from them, later in this blog. What is important to note now is that the speed and ferocity of these crises were unprecedented, and they mark the changes wrought by both technology and the inclusion of societies in the world economic system.
Today, money has moved beyond paper. It exists in bits and bytes, shot around the world at the speed of light. In fact, currency has actually been reduced to a credit instrument, because in retail Forex no actual currency is exchanged. This advance further streamlines the process. But despite the complexity of the international monetary system, it can still be boiled down to one simple transaction—a trade. In currency markets, there must always be a buyer and a seller, a winner and a loser. That partly explains the international appeal of currency trading. People around the world trade, no matter where they live or the style of their society. Virtually everyone inherently understands the currency market. It is one of the oldest forms of the market.
As this chapter has shown, the trade is an ancient and fundamental economic interaction, but the way trades are made today on the modern foreign exchange market is quite new. For most of history, trades were made between two or more people—but usually face to face. Merchants in the eighteenth century gathered in the coffeehouses of London. In New York, traders met under a tree on Wall Street. The telephone changed but did not radically alter this relationship. Orders were carried over the phone, but people still knew the face (or voice) of the person on the other end of the line. The Internet, which has been used popularly for scarcely a decade, has changed this system completely.
For the first time, relevant information was not posted by weary travelers or executives flying back on Pan Am from the Orient. Individuals and traders could get live data on CNN, Reuters, and Bloomberg. A vast amount of information on markets is now available, often free of charge and easily accessible from home via Internet news sites or 24-hour cable financial news networks. For most of the previous decades, this information was buried in the handwritten ledgers, orders, and charts kept by clerks in giant banks. The banks, naturally, used this information for their own purposes, and in foreign exchange that meant price discovery.
They were often the only ones to have an overview of the market, and they made a nice, safe profit. Investors, on the other hand, operated partly in the dark. It took longer for the market to determine an investment’s true price. Hence, margins and bid-offer spreads were wide.
The Internet has made it possible for a rumor to spread around the world, and be discredited, within seconds. We are at a turning point in the history of finance. To the average small investor, the workings of high finance have often appeared intimidating, incomprehensible, or inaccessible.
Wall Street was an exclusive club in which, by privilege of standing or wealth, favored insiders controlled money and information and made themselves rich. Small investors were also kept out by relatively high-commission fees to trade through a broker.
Now, the Internet provides the same service, virtually for free. The Internet provides rates and price spreads virtually instantaneously, 24 hours a day, seven days a week. Small Order Execution System (SOES) and the dot-com era of the ‘90s brought Wall Street to Main Street. Everyone from day traders to church groups became experts in U.S. equity markets. Now Forex will introduce the U.S. to the global market place.
Seeing the World Through Forex
This chapter opened with a description of the Silk Road 1,000 years ago. A New York Times reporter recently visited a city on the old route and wrote of the same mixture of people and goods that had characterized it centuries ago. The patrons who had crowded into local restaurants for dishes of lamb kebab and stew “seem as though they could have been chosen by casually throwing darts at a map of Asia”. “There are alluringly dressed women with black hair, fair skin and striking blue eyes who look passably Russian”, wrote the reporter. “There are men with heavily lined, tea-colored faces and brush-thick mustaches who resemble Afghans. There are Turkish looking Uighurs in Muslim skullcaps and robes and mid-length beards”.
4 Scenes like this are occurring all over the world. Trade is flowing again, released by a communications revolution and new geopolitical realities. Participating in Forex is to join this process, to see the world for the vibrant market that it is. Having an appreciation of this will allow you to see opportunities, anticipate movements, and be a better trader.
Because sorting and handling bills was relatively inefficient and costly, banks began to turn to a new form of money—electronic. In 1971, the NASDAQ stock exchange opened as a computerized system for selling and buying stocks. By the late 1970s, the banks of the Federal Reserve moved large amounts of money between themselves electronically.
The notion that money was not just a piece of paper, but also something that could assume electronic form, was accepted fitfully by the public. A major advance occurred in 1975, when the government began depositing Social Security checks directly into seniors’ accounts. The growth of credit card use also helped. But it has only been in the past 15 years that the true potential of electronic money has been tapped.
The reason is a vastly improved communication infrastructure that has linked the world in a web of fiber-optic cables. This web carries billions of bits of data at the speed of light. More drastic, however, is that the Internet allows anyone to hook into the vast, humming network of communication. Real-time data and general information take the price-discovery process away from interbank control. An individual sitting alone in his home can find at the click of a button an accurate price that only a few years ago would have required an army of traders, brokers, telephones, and squawk boxes. This is the force behind the growing Forex revolution.
These advances in communication came at a time when the former divisions that separated the world into different parts crumbled.
The Berlin Wall fell, the Soviet Union collapsed, and hundreds of millions of people joined the liberal, capitalist world, led by the U.S. This process—which has been imperfectly called “globalization”—has been monetary, cultural, and social.
For the foreign exchange markets, everything changed. Currencies that previously had been shut off in totalitarian political systems could be traded. Emerging markets such as those in Southeast Asia flourished, attracting capital and currency speculation.
The 1990s were years of enormous economic growth, but they were also rocked by several crises—in Mexico, in Russia, and in Asia. We will look into the circumstances behind these crises, and what a currency investor can learn from them, later in this blog. What is important to note now is that the speed and ferocity of these crises were unprecedented, and they mark the changes wrought by both technology and the inclusion of societies in the world economic system.
Today, money has moved beyond paper. It exists in bits and bytes, shot around the world at the speed of light. In fact, currency has actually been reduced to a credit instrument, because in retail Forex no actual currency is exchanged. This advance further streamlines the process. But despite the complexity of the international monetary system, it can still be boiled down to one simple transaction—a trade. In currency markets, there must always be a buyer and a seller, a winner and a loser. That partly explains the international appeal of currency trading. People around the world trade, no matter where they live or the style of their society. Virtually everyone inherently understands the currency market. It is one of the oldest forms of the market.
As this chapter has shown, the trade is an ancient and fundamental economic interaction, but the way trades are made today on the modern foreign exchange market is quite new. For most of history, trades were made between two or more people—but usually face to face. Merchants in the eighteenth century gathered in the coffeehouses of London. In New York, traders met under a tree on Wall Street. The telephone changed but did not radically alter this relationship. Orders were carried over the phone, but people still knew the face (or voice) of the person on the other end of the line. The Internet, which has been used popularly for scarcely a decade, has changed this system completely.
For the first time, relevant information was not posted by weary travelers or executives flying back on Pan Am from the Orient. Individuals and traders could get live data on CNN, Reuters, and Bloomberg. A vast amount of information on markets is now available, often free of charge and easily accessible from home via Internet news sites or 24-hour cable financial news networks. For most of the previous decades, this information was buried in the handwritten ledgers, orders, and charts kept by clerks in giant banks. The banks, naturally, used this information for their own purposes, and in foreign exchange that meant price discovery.
They were often the only ones to have an overview of the market, and they made a nice, safe profit. Investors, on the other hand, operated partly in the dark. It took longer for the market to determine an investment’s true price. Hence, margins and bid-offer spreads were wide.
The Internet has made it possible for a rumor to spread around the world, and be discredited, within seconds. We are at a turning point in the history of finance. To the average small investor, the workings of high finance have often appeared intimidating, incomprehensible, or inaccessible.
Wall Street was an exclusive club in which, by privilege of standing or wealth, favored insiders controlled money and information and made themselves rich. Small investors were also kept out by relatively high-commission fees to trade through a broker.
Now, the Internet provides the same service, virtually for free. The Internet provides rates and price spreads virtually instantaneously, 24 hours a day, seven days a week. Small Order Execution System (SOES) and the dot-com era of the ‘90s brought Wall Street to Main Street. Everyone from day traders to church groups became experts in U.S. equity markets. Now Forex will introduce the U.S. to the global market place.
Seeing the World Through Forex
This chapter opened with a description of the Silk Road 1,000 years ago. A New York Times reporter recently visited a city on the old route and wrote of the same mixture of people and goods that had characterized it centuries ago. The patrons who had crowded into local restaurants for dishes of lamb kebab and stew “seem as though they could have been chosen by casually throwing darts at a map of Asia”. “There are alluringly dressed women with black hair, fair skin and striking blue eyes who look passably Russian”, wrote the reporter. “There are men with heavily lined, tea-colored faces and brush-thick mustaches who resemble Afghans. There are Turkish looking Uighurs in Muslim skullcaps and robes and mid-length beards”.
4 Scenes like this are occurring all over the world. Trade is flowing again, released by a communications revolution and new geopolitical realities. Participating in Forex is to join this process, to see the world for the vibrant market that it is. Having an appreciation of this will allow you to see opportunities, anticipate movements, and be a better trader.
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History of Forex