Foreign Exchange is the largest financial market in the world with a daily volume of more than $5 trillion.
The Forex market operates as a decentralized network where institutions and common traders can carry out their foreign exchange transactions. There are many different categories of participants including banks, commercial corporations, investment firms, retail traders, and of course hundreds of Forex Brokers.
These are the key players in the Foreign Exchange market:
■ Interbank Participants
The interbank market is the leading power in terms of currency trading volumes. Banks of all types and sizes trade currencies through the ECN (Electronic Communication Network). Large European Banks account for a large percentage of total currency volumes. The leading private banks in the Forex market include Deutsche Bank, UBS, and Barclays.
■ Central Banks
Central banks are maybe the most important players in the currency market. An unexpected change in the interest rate policy of a key central bank can turn the Forex market upside down. Central banks move within the area shaped by the implementation of two monetary policies:
(1) Flexible-currency monetary policy (interest rate ↓ and local currency exchange ↓) to deal with weak growth and unemployment
(2) Hard-currency monetary policy (interest rate ↑ and local currency exchange ↑) to deal with inflation
Central banks may engage in several other types of interventions (oral or real) to stabilize the demand/supply for their local currency.
■ Investment Firms and Hedge Funds
Investment firms and portfolio managers trade Forex currencies for large accounts including commercial corporations, pension funds, and mutual funds. Hedge Funds trade also in the currency market (speculative positions). There are also specialized Forex Hedge Funds that trade exclusively in the Foreign Exchange market.
■ Commercial Corporations
Commercial corporations and especially multinational corporations execute regularly Forex transactions, for two main reasons:
(1) To pay for goods and services abroad
(2) To hedge against unwanted currency risk
Hedging against currency risk is very important for all firms as it can add a level of safety to their offshore branches. To hedge against risk, these corporations use derivative contracts such as Forex Futures, Swaps, and Forwards.
■ Retail Investors
Retail investors include all non-professional individual traders. The volume generated by retail investors is limited compared to the volume generated by banks but their role in the market is still important. Retail traders apply extreme capital leverage, and that means that they can highly influence the market in the short term. This is especially true for Forex exotic pairs. Individuals (retail traders) can apply a great variety of trading strategies including auto-trading, intraday trading, swing trading, and carry trading.
There are many different types of participants in the Forex market, each participant trades Forex for very different reasons. These are the goals of every participant.
- Central banks → Stabilize demand/supply for their local currency
- Hedge funds → Speculative Trades
- Commercial Banks → Financing of business operations
- Commercial Firms → Business operations and hedging
- Intraday retail traders → Speculative Trades
- Carry traders → Trade inefficiencies between the level of interest rates across currencies
□ Forex Market Participants
FxPros.net News Blog