Advent of US and World Markets

Trading has been around since the beginning of time. Different civilizations used various items to represent currency and exchange goods and services. The first forms of trade were simply bartering between goods and services. Later, various forms of precious metals were used.

The history for the securities markets began in the United States. In 1791 the country’s first stock exchange was established in Philadelphia. At the time Philadelphia was considered the most important city in the new nation. The New York Exchange was set up in 1792 when 24 merchants and brokers decided to charge commissions while acting as agents for other persons. They did much of their trading under a tree at 68 Wall Street.

Government securities formed the basis of the early trading. Stocks of banks and insurance companies were later added. As the country grew, shares in roads, canals and railroads expanded the fledgling market. In 1817 the New York brokers organized formally as the New York Stock and Exchange Board. In 1863 the New York Stock Exchange adopted its present name. Our modern markets became strictly regulated exchanges starting in the 1930’s.

Most major and developing countries have established their own exchanges to allow their home companies to tap into financial markets for share and debt offerings. Equity markets trade stocks (securities) while other exchanges specialize in bonds, commodities, futures, and options. A small exchange fee is paid to the exchange for each share that changes hands.

The 1929 stock market crash and the following Great Depression changed the way markets operate entirely. The Security and Exchange Commission (SEC) was created and instituted sweeping regulations. Congress established this U.S. regulatory commission in 1934, after the Senate Committee on Banking and Currency investigated the New York Stock Exchange’s operations. The commission’s purpose was to restore investor confidence by ending misleading sales practices and stock manipulations that led to the collapse of the stock market in 1929. It prohibited the buying of stock without adequate funds to pay for it, provided for the registration and supervision of securities markets and stockbrokers, and prevented unfair use of nonpublic information in stock trading. It also stipulated that a company offering securities make full public disclosure of all relevant information.

In 1971, the National Association of Securities Dealers (NASD) created a fully integrated, computerized trading system called the NASDAQ (National Association of Securities Dealers Automated Quotation system). This allowed NASD members to post competing bids and offers for a variety of stocks on an electronic exchange. This was a major departure from the “auction” markets of old (NYSE, AMEX, etc), and no longer required the use of Specialists, or humans, to make a market. By opening the NASDAQ system to direct execution by the public, traders were able to increase competition, which has lowered the spread (the difference between the bid price and the ask) on many NASDAQ listed stocks.

Futures trading began to take off in the 1970s with the development of futures on financial instruments. Trading in the Japanese Yen and Swiss Franc developed first. Then came trading on US government debt and in the 1980s, futures trading on Indices such as the S&P 500, which is today the most liquid and widely traded index in the world. Futures trading on commodities such as grains and oil were primarily used by end-users and producers to hedge price fluctuations. With the advent of electronic trading, commodities are now an asset class and traded by hedge funds, commercial banks, endowments and pension funds, and retail traders in addition to producers and end-users. Commodities are now a very liquid market and trade 23 hours a day, 5 days a week.

The US has been at the forefront in innovation and regulation of trading markets. As new markets emerge, particularly in China, many investors see the new and expanding regions as the best opportunities for investment. Most countries have their own Securities and Exchange Commission and regulators that were modeled after the United States. This gives comfort to investors worldwide that markets are looking to protect their investors and maintain integrity.

Forex Trading

Forex refers to the foreign exchange market. The forex market enables currency conversion and establishes the relative values of different currencies. Prior to the 1970s most currencies had a fixed conversion rate. This was known as the gold standard and the strength of a currency was determined by its gold reserves. Now currency values are determined by a floating exchange rate and determined by the market.

The forex market is the most liquid market in the world. An estimated $4 trillion a day is exchanged hands. Traders in the forex market include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. Trading in the United Kingdom accounted for approximately 37% of all activity, followed by the United States at 18% and Japan at 6%.

Currency trading happens throughout the 24 hour period. It starts with the Asian open, then progresses to Europe, then North America and back to Asia.

Causes Of Currency Fluctuations

Currency values can be affected by the following:

  • changes in GDP growth
  • inflation
  • interest rates
  • budget and trade deficits or surpluses
  • comments by finance ministers and central bank officials
  • news releases

Currencies are traded against one another in pairs. Each currency pair is an individual trading product and is quoted XXX/YYY. XXX and YYY are the ISO 4217 international three-letter code of the currencies involved. The first currency (XXX) is the base currency that is quoted relative to the value of the second currency (YYY). The second currency is called the counter currency or the quote currency. Usually the market quotes most exchange rates against the US dollar as the base currency. Examples are the USDJPY, USDCAD, and USDCHF. The exceptions are the British pound (GBP), Australian dollar (AUD) the New Zealand dollar (NZD) and the euro (EUR) where the US dollar (USD) is the counter currency.

The most heavily traded pairs are EUR/USD, USD/JPY and GBP/USD.

Binary Options

Binary options came into fashion mid-2008. Prior to 2008, they were traded mainly over-the-counter (OTC) and banks traded amongst themselves. They weren’t readily offered to the general investing public.

In 2007 the Options Clearing Corporation allowed binary options. The United States Securities and Exchange Commission approved cash-or-nothing binary options in 2008. In May 2008 the American Stock Exchange launched exchange traded European cash-or-nothing binary options. The Chicago Board Options Exchange followed suit in June 2008. In 2009 the North American Derivatives Exchange (Nadex) launched a full line of binary options vehicles. These exchanges allowed binary options to be exchange traded with continuous quotations.

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