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 on the ladder are.
It is essential for you to understand the nature of the spot forex market and who are the main forex market players.
Let’s learn about the main players in the forex market, from the big-shot banks to the little guys at home in their pajamas.
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 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
When it comes to forex trading, commercial banks and financial institutions are the movers and shakers.
Since the forex spot market is decentralized, it is the largest banks in the world that determine the exchange rates.
They’re responsible for most of the daily trading volume, and they make their money by acting as market makers.
This means they’re constantly buying and selling currencies, pocketing the difference between the bid and ask prices.
It’s a high-stakes game, but these banks have the deep pockets and expertise to play it.
These large banks, collectively known as the interbank market or Interdealer 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. Electronic Liquidity Providers (ELPs)
Electronic Liquidity Providers (ELPs) are specialized firms that have grown to be major players in the foreign exchange (FX) market by using advanced technology and trading algorithms to provide liquidity to market participants.
Examples of ELPs are Citadel Securities, Flow Traders, HC Tech, Jump Trading, Virtu Financial, and XTX Markets.
They operate as intermediaries between buyers and sellers in the currency market, constantly quoting bid and ask prices for various currency pairs.
Their presence helps ensure that market participants can find counterparties for their trades, allowing for faster execution and reducing the potential impact of market volatility.
3. 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 its 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 conversions happen that could move prices around.
Corporations might not be the most glamorous participants in the forex market, but they’re essential players nonetheless.
Companies that do business internationally need to buy and sell currencies to pay for goods and services, hedge their exposure to currency fluctuations, and manage their cash flow.
They may not be trading for profit, but their currency needs can still have a significant impact on the market.
4. 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.
Central banks are like the puppet masters of the forex market.
These big kahunas are responsible for implementing monetary policies that can move currency values.
They’re the ones who adjust interest rates and control the money supply.
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.
When central banks make a move, everyone pays attention!
5. 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.
For this lesson, let’s narrow down speculators into two buckets:
- Hedge funds
- Retail traders
Hedge Funds and Prop Firms: The Smart Money
Hedge funds and prop firms are known as the “smart money” in the forex market.
These savvy traders use advanced strategies and advanced analytical tools to make educated bets on currency movements.
They’re not afraid to take risks, and they often employ leverage to make their bets even bigger.
Retail Traders: The Little Folks with Big Dreams
Last but not least, we have the retail traders – the little guys and gals with big dreams.
These are individual traders who trade currencies from their home computers, smartphones, or tablets.
They may not have the deep pockets or sophisticated tools of the big players, but they’re a growing force in the forex market, thanks to the proliferation of online trading platforms and educational resources.
Retail traders come in all shapes and sizes, from the casual hobbyist who dabbles in forex trading for fun to the aspiring professional who dreams of quitting their day job to trade full-time.
They may not move the market like the big players, but they’re an essential part of the forex ecosystem.
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