History of Retail Forex
As a whole, retail trading is more structured than the Forex market. Modern retail trading has only been around since 1996, while Forex has been traded since the beginning of financial markets. Prior to 1996, retail investors were limited in their options for entering the Forex market. They could create a number of bank accounts, each one denominated in a different currency, and transfer funds from one account to another in order to profit from fluctuating exchange rate. However, this prooved to be troublesome because large transaction costs were incurred due to the small amount of funds being converted relative to the size of the market. This transaction type was at the very bottom of the Forex pyramid.
By 1996, Forex Trading became more practical when new market makers took advantage of developments in web-based technology. The new companies believed that there was enough liquidity in the Forex market, and eventually within their own customer base, to guarantee markets under all but the most unusual market conditions. Online trading platforms were developed by these companies to provide an easy and fast way for individuals to buy and sell on the Forex Spot market. These companies also realized that by pooling many retail traders together, they had the size to enter the upper echelons of the Forex market, which reduced the size of the spread. Market Makers were provided with better prices as the business grew. These better prices were then passed on to the customer.