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The previous lesson covered the basic structure of the forex market.
Now, it’s time for you to learn about the various participants that trade in it.
Sitting at the highest rung of the forex market hierarchy, commercial banks are the largest players in the market. They include many household names in the finance sector, such as:
These financial titans are responsible for most of the daily global trading volume and generate revenue by acting as market makers.
As market makers, these forex powerhouses constantly buy and sell currencies and keep the bid-ask spread for themselves.
These institutions can safely face the risks associated with forex trading because of their deep pockets and the cadre of experts under their employment.
These banks’ global presence also factors into their risk management as their worldwide operations let them spread their exposure across different regions and currencies.
ELPs are specialized firms that use advanced technologies to provide liquidity to forex market participants.
These enterprises have used advanced technologies and trading algorithms to establish themselves as major players in the forex market.
Some of the most well-known ELPs today include:
ELPs act as middlemen between buyers and sellers and constantly quote different prices for various currency pairs.
These liquidity providers ensure that traders always find a counterparty for their trades.
Multinational companies also play a major role in the forex industry. These large corporations often exchange large volumes of currencies to settle international payments.
For example, suppose a US company wants to buy computer parts from a Japanese manufacturer. To proceed with the sale, the US company will need to purchase Japanese yen with US dollars. It can then use the yen it bought to pay off the computer parts.
These dealings have smaller volumes than interbank transactions, and corporations commonly do them through commercial banks rather than brokers.
International mergers and acquisitions between big companies can result in fluctuations in the currency prices of the countries where they operate.
National governments and their central banks are frequent forex market players, too.
The governments of various countries involve themselves with forex trading for several reasons. These reasons can be to:
Central banks, as the financial arms of governments, are crucial players in the forex market.
Forex traders worldwide pay attention whenever central banks make announcements, as these can greatly affect market prices. Because of this, the central banks of countries with major currencies are particularly influential in the forex market.
These banks include:
As they control the interest rates and currency supplies of their countries, central banks can effectively control the value of their country’s currency.
There are two types of speculators: hedge funds and retail traders.
Speculators trade in the forex market for no other reason than to make profits. These traders make money from the difference between currency prices and always look for price fluctuations.
Traders refer to hedge funds – including proprietary or “prop” firms – as the forex market’s “smart money.”
These firms employ traders and equip them with advanced tools and necessary knowledge to ensure the profitability of their trades.
Hedge funds can also afford to trade consistently with leverage to enhance their returns further.
Retail traders – the smallest players – are the people testing their skills and luck in the forex market.
These are diverse individuals ranging from casual hobbyists to professional day traders.
While they may not have the same impact on the market as banks and large companies, retail traders are nonetheless equally important in the market dynamics.
In the next lesson, you’ll get to know the story behind it all – the history of forex trading.