The Rise of Electronic Currency Trading
The forex markets have had a limited form of electronic trading since the mid-1980s. At that time, the primary means of electronic trading relied on an advanced communication system developed by Reuters, known as Reuters Dealing. It was a closed-network, real-time chat system well before the Internet ever hit the scene. The Reuters system enabled banks to contact each other electronically for price quotes in so-called direct dealing.
This system functioned alongside a global network of brokerage firms that relied on telephone connections to currency trading desks and broadcast running price quotes, making them known as voice brokers.
The modern form of electronic currency trading debuted in the forex market in the early to mid-1990s, eventually supplanting much of the voice brokers’ share of trading volume. The two main versions of electronic matching systems were developed by Reuters and EBS for the institutional “interbank” forex market.
Both systems allowed banks to enter bids and offers into the system and trade on eligible prices from other banks, based on prescreened credit limits. The systems would match buyers and sellers, and the prices dealt in these systems became the benchmarks for currency price data, such as highs and lows.
Advances in trading software saw the development by major international banks of their own individualized trading platforms. These platforms allowed banks and their institutional clients, like corporations and hedge funds, to trade directly on live streaming prices fed over the banks’ trading platforms. These systems function alongside the matching systems, which remain the primary sources of market liquidity.
At the same time, retail forex brokers introduced online trading platforms designed for individual traders. Online currency trading allows for smaller trade sizes instead of the 1 million base currency units that are standard in the interbank market, such as 1 million American dollars or 1 million British pounds. Forex markets trade in such large, notional amounts because the price fluctuations are in tiny increments, commonly known as pips, usually 0.0001.
When retail currency trading broke into the mainstream, most online currency platforms offered trade sizes in amounts commonly known as lots, with a standard-size lot equal to 100,000 base currency units and mini-lots equal to 10,000 base currency units. However, as the retail market has evolved, brokers have started to act on demand for the ability to place smaller trades.
Most brokers now have an option to trade in micro 1,000 lots, which require a lot less capital than a mini or standard lot. This means that traders can enter the forex market with a lot less capital at risk.
In addition to multiple lot sizes, online brokerages offer generally high levels of margin, ranging from 50:1 to 200:1 and sometimes higher, depending on the regulations of the country that you trade in. This allows individual traders to make larger trades based on the amount of margin on deposit.
For example, at 100:1 leverage, a $2,000 margin deposit would enable an individual trader to control a position as large as $200,000. Retail forex brokerages offer leverage to allow individual traders to trade in larger amounts relative to the small size of pips.