Forex Market Participants

The Forex market is the biggest market in the world, with various parties interacting during the trading week. From retail traders (the average Joe trader) to big institutional players, investment houses, brokers, commercial and central banks, everyone has a say in the Forex market. It means that the moves this market makes are not able to be influenced by any one entity, due to the large number of participants that exchange currencies daily. As a rule of thumb, the more liquid a currency pair is, the most difficult it is to influence the way it moves. To get an idea about the size of this market, consider that every day 5 trillion dollars’ worth of transactions change hands. This makes the Forex market the most unpredictable market of them all, with many people looking for the holy grail in trading. The fact that it is so huge attracts immense interest, as players interested in trading big volumes cannot do that in other markets due to lack of liquidity. For example, consider hedge funds, which have an issue with scalability. The bigger the fund gets, the more difficult it is to enter a market and exit without causing significant disruptions. Such a problem doesn’t exist in the Forex market; no matter what size your trade is, there will always be a counterpart interested in what you’re offering. The idea of this article is to describe to you the parties involved in this market, and why it is important to know who we, as retail traders, are facing. Some of the participants may seem familiar, and some not; but in the end what matters is to keep in mind that all of them influence the price action of the currency pairs that form the Forex dashboard.

Who’s Who in the Forex Market?

Our financial system, the way it exists today, is centered around the world’s reserve currency, the US dollar. Having said that, it means that every international transaction must be denominated in the end, or cleared, in dollars. This makes the role of the Federal Reserve of the United States crucial in the way the global financial system works. It is worth mentioning here that it is not clear whether this is a burden or a privilege for the US economy.

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Retail Traders

To the surprise of many, retail traders comprise the smallest and least representative part of the whole Forex market. Roughly 5% of the overall Forex market consists of transactions taken by retail traders. However, due to the huge size of the overall market, this is still quite a chunk of the Forex brokerage industry. Moreover, it is increasing every day as more and more people are drawn to the trading circle, as worldwide Internet access is on the rise. Retail traders are either scalpers (involved in short-term oriented trading, looking for small profits that result from quick entries and exits daily), swing traders (keep their positions open for a few hours to a few days), or investors (have a bigger time horizon in mind when it comes to a trade’s outcome). Brokers use this information to offer different packages for each category.

Commercial Banks

Commercial banks have designated treasury departments that deal with exchanging currencies both on behalf of the bank and for investing purposes. The cost of keeping a cash position is quite high, and banks strive to move money as quick as possible, and with as little expense as possible. These banks have various options for that: either they park the excess money in the central bank using the overnight facility deposit rate, or loan to the economy (to people and businesses). Nowadays, with negative rates in many parts of the world, commercial banks are stimulated to lend the money rather than keeping it in the central bank’s vaults. The perfect example to illustrate how commercial banks participate in the Forex exchange market is to consider a merger and acquisition deal between two companies from different countries; let’s say, a company from the United States wants to buy one from the Eurozone. To pay for it, the acquiring company must use euros. To have euros, it must buy them on the open market, or give a mandate to a consortium formed of representative banks that, against a fee, will make sure the best possible rate for the deal is reached. In this way, banks are directly involved in exchanging currencies for both people and business entities. Commercial banks are an important part of the interbank market.

Central Banks

forex marketBelieve it or not, central banks have trading departments that monitor the Forex market and, from time to time, intervene in the market. The Swiss National Bank (SNB) and the Bank of Japan (BOJ) are two of the banks notorious for intervening in the market to influence the way their currencies (the Swiss franc and the Japanese yen are move). Moreover, sometimes, different monetary policies need market intervention for them to be implemented. When the SNB imposed the 1.20 floor on the EUR/CHF cross, this meant that the central bank bought the EUR/CHF pair every time it got closer to the floor rate. Even today, with quantitative easing programmes ongoing in many important central bank jurisdictions, market intervention is the norm. For example, the European Central Bank still buys government and corporate bonds monthly, and the way these bonds and their yield move influences the Forex market as well.

High-Frequency Traders

These are computer programs or robots designed to buy and sell thousands of trades per second and generate small profits on each trade. They are responsible for the aggressive and instant moves the market makes when economic releases hit the wires.

Forex Brokers

Forex brokers are an important sector of the interbank market, as they have special trading departments as well. Depending on the way a brokerage house is organised and functions, it may route its client’s orders to a liquidity provider for execution, or keep part or all the orders in-house. For the part that remains in-house, the broker takes the opposite site of the trade. This strategy is based on the statistic that over 90% of Forex retail traders lose their first deposit, and it means it is easier for the broker to make a profit if it positions itself on the other side. As you can see, Forex market participants are from different areas and with different backgrounds, but one thing is common to all of them: they all want to make a profit from the way currencies move. Therefore, the one who gets trading right stands the most chances of profiting from these moves.


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