Forex market and major players

Unlike stock markets the forex market is decentralized and divided into multiple levels with inter-bank markets (market where banks exchange different currencies) made of commercial banks and security dealers. Though till the early 1990s only the big players could participate in forex, online forex trading has brought it to individuals like you and us through the "retail spot markets". Today the major participants are


Big banks

Big banks essentially form the inter-bank market. Due to the decentralized nature of the retail spot market these banks determine the exchange rates based on demand and supply. These banks run transactions into billions of dollars every day. The list of major banks and their rough market share is shown below. They make 77% of all forex trades of the world.



Large corporations

Multinational corporations have regular transactions with different currencies either because they have global locations or because their clients and partners are international. With increasing global trade, these corporations now form an important part of foreign exchange markets. Some companies can have catastrophic effects if they are heavily exposed to any one currency and have entire departments dedicated to manage currency exchange risks.


Governments & their central banks

Governments participate through their Central banks or Reserve banks. This includes the Federal Reserve, Bank of England and the European Central Bank who try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.


Speculators & investment firms

Speculators who are merely betting that one currency will appreciate vs another and have no direct use of the currency they are buying. These players are merely in it for the money. They see it as an opportunity to make investments. While majority of them are short term traders, there are some long-term investors who go by macro-economic conditions. Those who bought the AUD against the USD would have made a sizeble profits in the last 12 months.


Retail forex brokers

Retail brokers are a growing segment of the speculative group that are in for the money. Thanks to internet and growing online trading this industry has the potential to grow into a multi-billion dollar industry.

The access to inter-bank market means best price and best liquidity. Inter-bank market players can save about $100 or more over the next level participants for every 1 million dollars traded. Best liquidity means inter-bank players get their orders executed before the price adjusts.

The second level players are large hedge funds, smaller international and national banks, and large brokerage firms. The third level players are corporations and small financial institutions. The fourth and last level is individuals who need foreign currencies for traveling, investment and other purposes.

The smaller and less sophisticated a player is, the higher transaction cost and the smaller liquidity it gets. In EUR/USD trades, an inter-bank player pays approximately $1 for every $10,000 while a traveller might pay as much as $500 for the same trade at an airport.

One important but controversial player is national central bank. Central banks use their often substantial foreign reserves to stabilize the speculations in the market.

The shear size of the forex market makes it impossible for any single participant (not even a central bank or inter-bank player) can manipulate the price for an extended period of time.

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