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There are two sets of letters: the first is AKEHCMBF and the second, the more commonly seen in competitions, is AKVESHCMRBIF. The first is used in a 20x20m arena and the latter in the 20x60m arena. You will note from this preamble that I have not answered the question. The answer is no one is absolutely sure of the origin, although three main theories exist:
1. the initials of towns taken by the Romans — mostly discounted;
2. positions taken by the German royalty and nobility when on parade;
3. the initials of horses in the stable yards of a William Cavendish, 1st Duke of Newcastle, 1592-1676.
The Story behind the Dressage Letters - Two Possible Explanations
lettersLetters were not used until international competitions began with the Olympics in the 1900's. The first competition in 1912 did not have letters.
No Olympics were held in 1916 because of World War I. The letters just "appeared' in 1920 Olympics and no one has ever been able to find the origin although various theories have been advanced over the years, including one theory that the letters were the first letter of the names of cities conquered by the Romans.
A second possibility:
"It appears that in the Old Imperial German Court the walls of the Royal Mews/Stable yard were initially marked with letters indicating where each Courtier and/or riders horse was to be stood to await its rider.
K = Kaiser/King
F = Furst/Prince
P = Pferdknecht/Ostler
V = Vassal
E = Edeling/Ehrengast/Guest of Honour
B = Bannertrager/Standard Bearer
S = Schzkanzler/Chancellor of Exchequer
R = Ritter/Knight
M = Meier/Steward
H = Hofsmarshall/Lord Chancellor"
However, in the 1920 Olympics, the letters on the centerline were also used: A, D, L, X, I, G, and C.