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 boys” 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?
Forex was originally intended to be used by bankers and large institutions, and not by us “little folks.”
However, because of the rise of the internet, online forex brokersare 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).
These large banks, collectively known as the interbank market, take on a ridonkulous amount of forex transactions each day for both their customers and themselves.
They are known 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 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.
Since the volume they trade is much smaller than those in the interbank market, this type of market player typically deals with commercial banks for their transactions.
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.
By doing this, they can affect currency valuation.
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
Currency speculation is the act of buying and holding foreign currency in the hopes of selling that currency at a higher exchange rate in the future.
This is in contrast to those who buy currencies to finance a foreign investment or to pay for imported products or services.
“In it to win it!”
This is probably the mantra of the speculators.
Speculation in the forex market involves the buying and selling of currencies with the view of making a profit.
Speculators are focused on price fluctuations.
It is called speculation because of the uncertainty involved since no one can know for sure whether a currency pair’s price will go up or down.
Traders assess the likelihood of either scenario before placing a trade.
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.
Once you graduate from the School of Pipsology, you might just end up joining this crowd.
Of course, how can you be one of the cool cats if you don’t even know your forex history?