Now that you understand the broad structure of the forex market, let’s dig a little deeper to discover who these people on the ladder are.
It is critical that you grasp the nature of the spot forex market and who the major forex market participants are.
Only the “big boys” could play this game until the late 1990s.
Initially, you could only trade if you had between ten and fifty million dollars, to begin with. Is that chump change?
Forex was designed to be utilized by bankers and major institutions, not by us “small people.”
However, since the internet has grown in popularity, online forex brokers are now able to provide trading accounts to “retail” traders like us.
Without further ado, here are the top players in the FX market:
1. The Super Banks
Because the FX spot market is decentralized, the largest banks in the world determine the exchange rates.
They are the ones who make the bid/ask spread that we all enjoy based on currency supply and demand (or hate).
Each day, these huge banks, known collectively as the interbank market, undertake a staggering number of FX transactions for both their customers and themselves.
They are referred to as “flow monsters.”
For these flow monsters, the name of the game is volume and capturing their share of the trading flow of currencies.
A couple of these flow monsters include Citi, JPMorgan, UBS, Barclays, Deutsche Bank, Goldman Sachs, HSBC, and Bank of America.
2. Large Commercial Companies
Companies participating in the foreign exchange market to conduct business.
When purchasing electronic parts from Japan, Apple, for example, must first exchange its US dollars for Japanese yen. Because they trade in much smaller volumes than those in the interbank market, this sort of market participant often conducts transactions with commercial banks.
Currency exchange rate changes can be caused by mergers and acquisitions (M&A) between large corporations.
Many currency discussions occur in international cross-border M&As, which can cause price fluctuations.
3. Government and Central Banks
Governments and central banks, like the European Central Bank, the Bank of England, and the Federal Reserve, are also active participants in the FX market. National governments, like corporations, use the forex market for operations, international trade payments, and managing their foreign exchange reserves.
Meanwhile, when central banks modify interest rates to combat inflation, they have an impact on the FX market. They can influence currency valuation by doing so.
When central banks aim to realign exchange rates, they may intervene in the forex market, either directly or indirectly. When central banks believe that their currency is overpriced or underpriced, they launch major sell/buy operations to modify exchange rates.
4. The Speculators
Currency speculation is the act of purchasing and holding the foreign currency with the aim of later selling it at a higher exchange rate.
In contrast, those that purchase currencies do so to fund a foreign venture or to pay for imported goods or services. Speculation in the currency market entails purchasing and selling currencies in order to profit.
Price variations are of particular interest to speculators. Because no one can predict whether the price of a currency pair will rise or fall, it is referred to be speculation.
Before entering a transaction, traders evaluate the possibility of either event.
Speculators, who account for about 90% of all trading volume, come in all forms and sizes. Some have deep finances, while others are skint, but they are all in the forex market to make a lot of money.
Next Lesson: The Forex History