July 28, 2017

The Evolution of Trading

Trading has changed considerable over the years, with key events shaping how trading is now carried out. Many highs and lows in the history of trading and finance have changed the way in which we do things, and are the reason that many things are like they are. We take a look over the evolution of trading, and how it has affected the way in which we trade now.


The British Navigation Act of 1651 was introduced, which prohibited foreign ships from taking part in any coastal trade. All imports from Europe were required to be carried by British ships, or on a ship that was registered in the country where the goods were produced.

Although this was a great example of a mercantilist trade, this was soon to come under attack though, when a number of theories gained influence, and ignited a trend towards a liberalised trade, which was to be a trend that was led initially by Great Britain.


Adam Smith, who is often referred to as the father of Economics, wrote the famous book, ‘The Wealth of Nations’, which defined the importance of specialisation in production and brought international trade because of this. David Ricardo developed the comparative advantage principles, which is still applied today. These thoughts and principles have influenced international trade policies across the whole world.


After ‘The Wealth of Nations’ and other principles were introduced, many economists and businessmen actually voiced their opposition to their high custom duties. This surprising change in attitude, led to the signing of a number of different agreements, including the Anglo-French Treaty, which ended the economic war between the two countries.


The Reciprocity of Duties Act was passed. This aided British carry trade greatly, and allowed the reciprocal removal of import duties under bilateral trade agreements with other nations.


Corn Laws were appealed, which halted the levied restrictions on grain imports.


The Cobden-Chevalier Treaty, which was in place between Britain and France, had significant reciprocal reductions in the tariff, and included a most favoured nation clause (MFN). It was this treaty that then helped spark other MFN treaties throughout the rest of Europe, which led to the growth of multilateral trade.


The Free Trade Agreement was struck between France and Britain, during the reign of Napoleon III.


The Japanese Meji Restoration began, and started industrialisation by means of free trade.


Multilateral trading began to slow, and the world economy fell into a severe depression, which lasted for four years. The depression increased the pressure for greater domestic protection, which dampened any previous attempts to access foreign markets.


Although the US had never taken part in the trade liberalisation that Europe had been involved with, throughout the latter half of the 19th Century, protectionism increased significantly, and duties during the Civil War were rising, so the McKinley Tariff Act of 1890 was introduced.


The west countries moved towards economic liberty. This saw quantitative restrictions were negated and custom duties were significantly reduced. All currencies could be converted into Gold, which was the international monetary currency of exchange. Trade between different countries was free and easy at this point, and businesses were established everywhere.


The Panama Canal opened, which meant that ships travelling from New York to San Francisco a lot easier. In fact, the ships were able to save 7,872 miles, as they did not have to travel around South America. This was a massive progression in trading, and once that the global commerce have never looked back on.


Although world-wide trade had been considered successful and had started to expand and grow, despite the fact it had faced a number of different hurdles, World War 1 proved to be fatal for trade that had begun in the early 19th Century.


Post the First World War, the economy went into a recession, which changes the balance of world trade yet again. Many countries saw fluctuations to their currencies as well as a deprivation. This created various economic pressures on Governments, who felt compelled to adopt protective mechanisms by raising customs duties and tariffs.


Protectionist trade barriers led the newly formed League of Nations to organise the very first First World Economic Conference, to outline a new multilateral trade agreement that the First World War had destroyed. Although little did they know at the time that any efforts would have very little effect, as the Great Depression would initiate a new wave of protectionism, and the economic insecurity would go some way to create the conditions for World War II.


Another depression once again changed a number of countries economies, which raised import duties some more, in order to maintain a good balance of payments and import quotas. Quantity restrictions were also introduced, including import prohibitions and licensing.


The US and Britain emerged from the Second World War, and started to engineer a plan for a better open international system. The Bretton Woods Agreement was formed, which saw the start of the International Monetary Fund (IMF), World Bank and International Trade Organisation (ITO).


Europe began a program of regional economic integration, through the creation of the European Coal and Steel Community. This would eventually evolve into the European Union (EU).


The Middle Eastern oil crisis, saw a huge change in the way in which trading was carried out, as an embargo was placed on oil trade, in response to the US involvement in Israel’s Yom Kippur War. Oil is one of the world’s biggest and most important commodities, and because it was no longer able to trade, saw many economies go into crisis. This had an impact of the GBP, and almost led to the collapse in the pound, which only recovered when the government intervened.


This year saw Wall Street’s fixed commissions end. The Securities and Exchange Commission ends the price fixing practice, where brokers would charge 1 percent on all transactions. Because of this, by the end of this year, 35 brokerage firms had disappeared.


This year saw John Bogle launch the First Index Investment Trust. Eventually, this fund became the might Vanguard Index 500, and started with just $11million in assets. It started a revolution in investing though, and lured billions from different investors who were concerned about the risks and costs of actively managed funds.

1985-Early 90’s

The US pursued trade negotiations, and formed an agreement with Israel. The trilateral North American Free Trade Agreement was also formed with Mexico and Canada, leading to many more significant regional agreements taking place in South America, Africa, and Asia.


Although the causes are often debated, a lot of blame has been placed on the growth of programme trading, which saw computers executing a high number of trades. A lot of these had been programmed to sell as prices dropped, which effectively caused a self-inflicted crash.

This significant crash was relatively short lived though and after just a month, the market was already up. This could be contributed to the introduction of circuit breakers that could halt trading.

Mid 1990’s

After the break up from the Soviet Union, the EU pushed trade agreements, and established bilateral trade agreements with Middle Eastern countries.


Following the Uruguay Round of trade negotiations, the World Trade Organisation (WTO) succeeded the GATT (The General Agreement on Tariffs and Trade) as the global supervisor of world trade liberalisation. The WTO included policies on services, intellectual property, and investment which had not happened before. By the early 21st Century, there were over 145 members.


China and India grow as World Financial Powers. 2005 saw the two economies grow at the rate of 7-8 percent for decades, and currently, the two countries account for one third of the world’s population. They have very highly skilled traders and workers, which has led to a million scientists and engineered being trained in India and China each year, which is much lower number than the US. It has been predicted that the balance of power in technologies is likely to move from West to East.


The World’s financial crisis hit, that would hit the entire world’s financial markets. This is still reflected in the European sovereign debt crisis, and has resulted in the collapse of a number of large financial institutions. This has been considered to be one of the worst crises, since the Great Depression. There are considered to be many different causes; however, one of the main triggers is considered to be the crash of the US housing market.


This was the year that Britain decided they wanted to leave the EU, which had a huge impact of the currency market. The GBP/EUR rate instantly dropped from 1.34 to 1.24, and continued to drop around 20% in just two weeks. The GBP/USD fell from 1.49 to 1.28, the GBP/CAD fell from 1.95 to 1.67, and the GBP/AUD fell from 1.96 to 1.73. The FTSE25 and FTSE100 were also dramatically hit, causing the globe to panic, but the following weeks saw them recover; however, the same could not be said about the European stock markets. Although it has not happened yet, Brexit has the potential of causing a global decision, placing a lot of any new trade agreements between the UK and the EU.

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