A Look At The History Of Foreign Exchange
The history of foreign exchange is always changing and adapting to a shifting world economy and financial environment. The metamorphosis of the 1980s and ‘90s in both finance and technology has changed the structure of the market and its operations in very profound ways. It is useful to re-examine the foreign exchange market from today’s perspective.
Markets go back a long time in English law, the concept was recognized as early as the 11th century and it makes an interesting comparisn with today’s foreign exchange market.
More than one hundred years ago, Alfred Marshall wrote that:
"a perfect market is a district, small or large, in which there are many buyers and many sellers, all so keenly on the alert and so well acquainted in one another’s affairs that the price of a commodity is always practically the same for the whole of the district."
Today’s 'over the counter' global market in foreign exchange meets many of the standards that classical economists expected of a smoothly functioning and effective market:
Markets go back a long time in English law, the concept was recognized as early as the 11th century and it makes an interesting comparisn with today’s foreign exchange market.
More than one hundred years ago, Alfred Marshall wrote that:
"a perfect market is a district, small or large, in which there are many buyers and many sellers, all so keenly on the alert and so well acquainted in one another’s affairs that the price of a commodity is always practically the same for the whole of the district."
Over The Counter Foreign Exchange Market
Today’s 'over the counter' global market in foreign exchange meets many of the standards that classical economists expected of a smoothly functioning and effective market:
- There's any number of buyers and sellers.
- Entry to the market by new participants is not too difficult.
- The over-the-counter market is not confined to single geographical areas as the classical standards required.
Technology And The Forex
With the advances of technology, information is moved quickly and efficiently around the world, with vast amounts of information on political and economic developments affecting exchange rates almost instantly. As in commodity markets, identical products are being traded in financial centers all around the world.
The same yen, dollars, francs, marks and other currencies are being bought and sold, no matter where the purchases take place. Traders in different counties are continuously in touch and buying and selling from each other. With trading centers world-wide open at the same time, there is no evidence of substantial price differences lasting more than momentarily.
Not all of the features of today’s over the counter markets fully conform to the classical ideals. There's not the perfect “transparency,” or full and immediate disclosure of all trading activity from bygone years -- individual traders know about the orders and the flow of trading activity in their own firms, but that information might not be known to everyone else in the market.
However, transparency has increased enormously in recent years, and with the growth of electronic dealing and brokering systems, the price discovery process has become less exclusive and pricing information has become more broadly disseminated -- at least for certain foreign exchange products and currency pairs.
Indeed, by most measures, the over the counter forex market is regarded by observers as not only extremely large and liquid, but also efficient and smoothly functioning.