Players forex market

Forex Market Players.

There are various players in the Foreign Exchange (Forex) market and all of them are important in one way or the other. In this chapter, we take each one of them and check their major attributes and responsibilities in the overall Forex market.

Interestingly, internet technology has really changed the existence and working policies of the Forex market-players. These players now have easier access to data and are more productive and prompt in offering their respective services.

Capitalization and sophistication are two major factors in categorizing the Forex market players. The sophistication factor includes money management techniques, technological level, research abilities, and the level of discipline. Considering these two broad measures, there are six major Forex market players −

Commercial and Investment Banks Central Banks Businesses and Corporations Fund Managers, Hedge Funds, and Sovereign Wealth Funds Internet-based Trading Platforms Online Retail Broker-Dealers.

The following figure depicts the top-to-bottom segmentation of Foreign Exchange Market players in terms of the volume they handle in the market.

Commercial and Investment Banks.

Banks need no introduction; they are ubiquitous and numerous. Their role is crucial in the Forex network. The banks take part in the currency markets to neutralize the foreign exchange risks of their own and that of their clients. The banks also seek to multiply the wealth of their stockholders.

Each bank is different in terms of its organization and working policy, but each one of them has a dealing desk responsible for order processing, market-making, and risk management. The dealing desk plays a role in making profits by trading currency straight through hedging, arbitrage, or a mixed array of financial strategies.

There are many types of banks in a forex market; they can be huge or small. The most sizeable banks deal in huge amounts of funds that are being traded at any instant. It is a common standard for banks to trade in 5 to 10 million Dollar parcels. The biggest ones even handle 100 to 500 million Dollar parcels. The following image shows the top 10 forex market participants.

Central Banks.

A central bank is the predominant monetary authority of a nation. Central banks obey individual economic policies. They are usually under the authority of the government. They facilitate the government’s monetary policies (dealing in keeping the supply and the availability of money) and to make strategies to smoothen out the ups and downs of the value of their currency.

We have earlier discussed about the reserve assets. Central banks are the bodies responsible for holding the foreign currency deposits called "reserves" aka "official reserves" or "international reserves".

The reserves held by the central banks of a country are used in dealing with foreign-relation policies. The reserves value indicates significant attributes about a country’s ability to service foreign debts; it also affects the credit rating measures of the nation. The following figure shows the central banks of various European countries.

Businesses and Corporations.

All participants involved in the forex market do not have the power to set prices of the currency as market makers. Some of the players just buy and sell currency following the prevailing exchange rate. They may seem to be not so significant, but they make up a sizeable allotment of the total volume that is being traded in the market.

There are companies and businesses of differing sizes; they may be a small importer/exporter or a palpable influencer with a multi-billion Dollar cash flow capability. These players are identified by the nature of their business policies that include: (a) how they get or pay for the goods or services they usually render and (b) how they involve themselves in business or capital transactions that require them to either buy or sell foreign currency.

These "commercial traders" have the aim to utilize financial markets to offset their risks and hedge their operations. There are some non-commercial traders as well. Unlike commercial traders, the non-commercial ones are considered speculators. Non-commercial players include large institutional investors, hedge funds, and other business entities that trade in the financial markets for profits.

The following figure shows some prominent businesses and corporations in Forex markets.

Fund Managers, Hedge Funds, and Sovereign Wealth Funds.

This category is not involved in defining the prices or controlling them. They are basically transnational and home-country’s money managers. They may deal in hundreds of millions of dollars, as their portfolios of investment funds are often quite large.

These participants have investment charters and obligations to their investors. The major aim of hedge funds is to make profits and grow their portfolios. They want to achieve absolute returns from the Forex market and dilute their risk. Liquidity, leverage, and low cost of creating an investment environment are the advantages of hedge funds.

Fund managers mainly invest on behalf of the various clients they have, such as the pension funds, individual investors, governments and even the central bank authorities. Sovereign wealth funds that manage government-sponsored investment pools have grown at a fast rate in the recent years.

Internet-based Trading Platforms.

Internet is an impersonal part of the forex markets nowadays. Internet-based trading platforms do the task of systematizing customer/order matching. These platforms are responsible for being a direct access point to accumulate pools of liquidity.

There is also a human element in the brokering process. It includes all the people engaged from the instant an order is put to the trading system till it is dealt and matched by a counter party. This category is being handled by the "straight-through-processing" (STP) technology.

Like the prices of a Forex broker's platform, a lot of inter-bank deals are now being handled electronically by two primary platforms: the Reuters web-based dealing system, and the Icap's EBS which is short for "electronic brokering system that replace the voice broker once common in the foreign exchange markets. Some online trading platforms are shown below.

Online Retail Broker-Dealers.

The last segment of the Forex markets, the brokers , are usually very huge companies with huge trading turnovers. This turnover provides the basic infrastructure to the common individual investors to invest and profit in the interbank market. Most of the brokers are taken to be a market maker for the retail trader. To provide competitive and popular two-way pricing model, these brokers usually adapt to the technological changes available in the Forex industry.

A trader needs to produce gains independently while using a market maker or having a convenient and direct access through an ECN.

The Forex broker-dealers offset their positions in the interbank market, but they do not act exactly the same way as banks do. Forex brokers do not rely on trading platforms like EBS or Reuters Dealing. Instead, they have their own data feed that supports their pricing engines.

Brokers typically need a certain pool of capitalization, legal business agreements, and straightforward electronic contacts with one or multiple banks.

Forex Players.

Market players mainly are commercial banks executing orders from exporters, importers, investment institutions, insurance and retirement funds, hedgers and private investors. Commercial banks also perform trading operations in their own interests and at their own expenses. Daily turnover of the largest banks often exceeds several billions of U. S. Dollars and many make their main profit by speculative operations with currency.

Brokerage houses are also playing an important role of contractor between large numbers of banks, funds, commission houses, dealing centers, etc.

Commercial Banks and Brokerage Houses do not only execute currency exchange operations at prices set by other active players, but come out with their own prices as well, actively influencing the price formation process and the market life. That is why they are called market makers.

Market players mainly are commercial banks executing orders from exporters, importers, investment institutions, insurance and retirement funds, hedgers and private investors. Commercial banks also perform trading operations in their own interests and at their own expenses. Daily turnover of the largest banks often exceeds several billions of U. S. Dollars and many make their main profit by speculative operations with currency.

Brokerage houses are also playing an important role of contractor between large numbers of banks, funds, commission houses, dealing centers, etc.

Commercial Banks and Brokerage Houses do not only execute currency exchange operations at prices set by other active players, but come out with their own prices as well, actively influencing the price formation process and the market life. That is why they are called market makers.

In contrast to the above, passive players cannot set their own quotations and make trades at quotations offered by active market players. Passive market players normally pursue the following aims: payment of export - import contracts, foreign industrial investments, opening of branches abroad or creation of joint ventures, tourism, speculation on rate difference, hedging of currency risks (insurance against losses in case of unfavorable price changes), etc.

The composition of the participants witnesses that this market is actively used by serious business and for serious purposes. That is not all market participants are working on Forex for speculative purposes. As already mentioned, a change in currency exchange rates may lead to huge losses in export-import operations. Attempts to protect against currency risks force exporters and importers to apply certain hedging instruments: forward deals, options, futures, etc. Moreover, even a business that is not associated with export-import operations, may incur losses in case of changes in currency exchange rates. Therefore, the study of Forex is a mandatory component of any successful business.

Market players can be divided into several groups:

Central Banks.

Their main task is exchange regulations in the foreign market, namely, the prevention of spike rates of national currencies in order to prevent economic crises, maintaining the exports and imports balance. Central banks have a direct impact on the currency market. Their influence can be direct - in the form of currency intervention, or indirect – via regulation of money supply and interest rates.

Their main task is exchange regulations in the foreign market, namely, the prevention of spike rates of national currencies in order to prevent economic crises, maintaining the exports and imports balance. Central banks have a direct impact on the currency market. Their influence can be direct - in the form of currency intervention, or indirect – via regulation of money supply and interest rates. Central bank may act in the market on their own to influence the national currency, or together with other central banks to conduct a joint monetary policy in the international market or for joint interventions. Central banks are normally entering the Forex market not for profit, but to verify the stability or correct the existing national currency exchange rate for it has a significant impact on the home economy. Central banks may not be attributed to either "Bulls" or "Bears", because they can play bullish as well as bearish, depending on the particular challenges facing them at the moment. Central banks may also enter the currency market through commercial banks. Although profit is not the main purpose of these banks, unprofitable operations do not attract them either, so the central banks' intervention are normally disguised and carried out through several commercial banks at the same time. Central banks of different countries sometimes join together for coordinated interventions. The greatest influence on world currency markets were:

U. S. Central Bank - US Federal Reserve (Fed) European Central Bank (ECB) Bank of England (also known as the Old Lady) Bank of Japan.

Commercial Banks.

They execute most of foreign exchange operations. Other market participants carry out conversion and deposit-lending operations through accounts opened in commercial banks. Banks accumulate (via transactions with clients) the aggregate market demand for currency conversions, as well as for fundraising or investment to fulfill them in other banks. Apart from dealing with clients' requests, banks may operate independently and at their own expense.

They execute most of foreign exchange operations. Other market participants carry out conversion and deposit-lending operations through accounts opened in commercial banks. Banks accumulate (via transactions with clients) the aggregate market demand for currency conversions, as well as for fundraising or investment to fulfill them in other banks. Apart from dealing with clients' requests, banks may operate independently and at their own expense.

Foreign exchange market at the end of the day is a market of interbank deals, therefore speaking of the movement of exchange or interest rates, we will have the interbank foreign exchange market in mind. International exchange markets are most of all affected by major international banks with daily volume of transactions estimating in billions of US Dollars. These are Deutsche Bank, Barclays Bank, Union Bank of Switzerland, Citibank, Chase Manhattan Bank, Standard Chartered Bank and others. Their main difference is large volume of transactions, frequently causing significant changes in quotations.

Big players may act as either "Bulls" or "Bears".

"Bulls" are those market participants who are interested in enhancing the value of currency. "Bears" are interested in reduction of currency value.

The market is permanently in equilibrium between the bulls and the bears, so currency quotations fluctuate within fairly narrow limits. However, when either of the group prevails, exchange rates change in a rather dramatic and significant way.

Firms Performing Foreign Trade Operations.

Companies, participating in international trade constantly demand foreign currency (importers) or supply foreign currency (exporters), as well as place or attract free currency volumes in form of short-term deposits. These participants do not have a direct access to the currency market and realize their conversion and deposit transactions via commercial banks.

Firms Carrying out International Investment.

Investment Funds, Money Market Funds and International Corporations and companies, represented by various international investment funds, implement the policy of diversified management of assets portfolios by placing money in securities of governments and corporations of different countries. They are simply called funds in dealer slang. The best known funds are "Quantum" of George Soros executing successful exchange speculations, or a "Dean Witter" fund. Major international corporations engaged in foreign industrial investments: creation of subsidiaries, joint ventures and the likes, such as, for example, Xerox, Nestle, GE (General Electric), BP (British Petroleum) and others are also a part of this group.

Currency Exchange.

In some countries with transition economies there are currency exchanges, whose functions include currency exchange for businesses and adjustment of market exchange rates. The state is usually actively regulating the exchange rate, taking the advantage of the exchange market size.

Brokerage Firms.

Brokerage firms are bringing together buyers and sellers of foreign currency and conduct conversions, as well as lending and depositing operations. Brokers charge commission for their intermediary services in form of a percentage per transaction.

So called ECN (Electronic Communication Network) brokers have been widely developing recently. ECN is a trading platform where currency exchange requests from various contractors are brought together. Their clients are large banks, brokerage firms and private clients. The access to such brokers is not available to the most of private investors because of high standard. It is assumed that ECN brokers do not act as counterparties with clients, that is they are not market makers and charge only a commission.

Individuals.

Individuals realize a wide range of non-trade transactions in the sphere of foreign tourism, transfers of salaries, pensions, royalties, buying and selling of cash.

With the introduction of margin trading individuals have received an opportunity to invest free funds in the Forex market with the aim to make profit.

OIL + XAU + XAG / EUR.

© IFCMARKETS. CORP. 2006-2017 IFC Markets is a leading broker in the international financial markets which provides online Forex trading services, as well as future, index, stock and commodity CFDs. The company has steadily been working since 2006 serving its customers in 18 languages of 60 countries over the world, in full accordance with international standards of brokerage services.

Risk Warning Notice: Forex and CFD trading in OTC market involves significant risk and losses can exceed your investment.

IFC Markets does not provide services for United States and Japan residents.

Forex Market Players.

Now that you know the overall structure of the forex market, let’s delve in a little deeper to find out who exactly these people in the ladder are.

It is essential for you that you understand the nature of the spot forex market and who are the main forex market players.

Until the late 1990s, only the “big guys” could play this game. The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with. Chump change right?

However, because of the rise of the internet, online forex brokers are now able to offer trading accounts to “retail” traders like us.

Without further ado, here are the major forex market players:

1. The Super Banks.

Since the forex spot market is decentralized, it is the largest banks in the world that determine the exchange rates.

Based on the supply and demand for currencies, they are generally the ones that make the bid/ask spread that we all love (or hate, for that matter).

A couple of these super banks include Citi, JPMorgan, UBS, Barclays, Deutsche Bank and HSB C. You could say that the interbank market is THE foreign exchange market.

2. Large Commercial Companies.

Companies take part in the foreign exchange market for the purpose of doing business.

For instance, Apple must first exchange its U. S. dollars for the Japanese yen when purchasing electronic parts from Japan for their products.

Mergers and acquisitions (M&A) between large companies can also create currency exchange rate fluctuations.

In international cross-border M&As, a lot of currency conversations happens that could move prices around.

3. Governments and Central Banks.

Governments and central banks, such as the European Central Bank, the Bank of England, and the Federal Reserve, are regularly involved in the forex market too.

Just like companies, national governments participate in the forex market for their operations, international trade payments, and handling their foreign exchange reserves.

Meanwhile, central banks affect the forex market when they adjust interest rates to control inflation.

There are also instances when central banks intervene, either directly or verbally, in the forex market when they want to realign exchange rates.

Sometimes, central banks think that their currency is priced too high or too low, so they start massive sell/buy operations to alter exchange rates.

4. The Speculators.

“In it to win it!”

This is probably the mantra of the speculators. Comprising close to 90% of all trading volume, speculators as forex market players come in all shapes and sizes.

Some have fat pockets, some roll thin, but all of them engage in the forex simply to make bucket loads of cash.

Don’t worry… Once you graduate from the School of Pipsology, you can be part of this cool crowd! Of course, how can you be one of the cool cats if you don’t even know your forex history?

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WHO ARE THE PLAYERS IN THE FOREX MARKET?

and decentralized markets operate.

via interbank brokers or through electronic brokering systems like Electronic Brokering Services (EBS) or Reuters. The interbank market is a credit-approved system where banks trade based solely on the credit relationships they have established with one another. All the banks can see the rates everyone is dealing at; however, each bank must have a specific credit relationship with another bank in order to trade at the rates being offered. Other institutions such as online FX market makers, hedge funds, and corporations must trade FX through commercial banks. Many banks (small community banks, banks in emerging markets), corporations, and institutional investors do not have access to these rates because they have no established credit lines with big banks. This forces small participants to deal through just one bank for their foreign exchange needs, and often this means much less competitive rates for the participants further down the participant hierarchy.

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