The forex market, like any other market, is driven by the laws of demand and supply. For each currency, high demand drives up its price. On the flip side, an increase in a currency’s supply with no corresponding increase in demand lowers its price. More than $6.6 trillion is traded on the currency exchange market every day. It follows that those that control the largest share of this traded volume have the most impact on currency prices.
Who are the main participants in the FX market?
1. Central Banks and high-ranking government officials
These are the biggest market players in the forex market. Central banks are the bodies mandated with creating monetary policy and regulating interest rates in each country. When their chairs speak, any hints at future monetary policy are capable of moving currency prices. The Fed chair, Jerome Powell, and the president of the ECB, Christine Lagarde, are two of the most notable figures whose speeches move the markets.
Additionally, some high-ranking government officials are capable of moving the market if they hint at monetary policy plans. This was evident in the reign of Donald Trump as POTUS when his tweets would cause ripples in the currency market. The detrimental effects to the dollar he caused reverberated to most of the world’s major currencies.
2. Commercial banks
Commercial banks have access to huge volumes of capital, which gives them an edge over most currency traders. Additionally, their vast pool of resources, their close proximity to central banks, and their access to their clients’ orders make them more informed on market sentiment than most of the other traders. Due to this, these banks are perfectly positioned to trade the forex market, which they do.
Other than trading currencies for their own profit, commercial banks also execute trades for their clients. Each bank operates a dealing desk, which executes orders, acts as a market maker, and mitigates the bank’s risk. Furthermore, some of these banks trade with each other, which brings about the interbank market. This is where banks trade currencies amongst themselves and establish the exchange rates they are going to charge their clients. The competition between the various banks on this interbank market contributes to the tight spreads and fair prices offered by individual banks.
3. Businesses and other companies
There are several businesses and companies that have international operations or engage in import and export. Usually, they get paid or pay for their goods and services using several different currencies. To offset the risk of losing money from currency value fluctuations, they actively trade the forex market. Such organizations are called commercial traders.
There are other organizations that do not have international interests, but they trade forex all the same for profit. These include institutional investors, hedge funds, and other large corporations. They are called non-commercial traders, as they are essentially speculators, only with access to more capital resources.
4. Fund managers, sovereign wealth funds, and hedge funds
Fund managers are individual traders who are tasked with investing and multiplying pension funds, trust funds, individual trader’s funds, and even government funds. Some countries have huge capital incomes, such as Qatar and Saudi Arabia, from oil. Such countries employ individuals to invest and manage this capital. Such individuals are called sovereign wealth fund managers.
A hedge fund, on the other hand, is a pool of capital contributed by several investors. These investors entrust their funds to a hedge fund manager who invests them with the goal of increasing their investors’ wealth. For this reason, they have been known to take aggressive risks in search of huge profits. The liquidity, availability of leverage, and the relatively low cost of trading provide a suitable habitat for these hedge fund managers.
Due to their huge capital outlay, these players can make huge trades that influence market trends. However, they still fall victim to the volatility of the market.
5. Online trading platforms
Traditionally, the forex market worked through a string of individuals communicating to match buy orders with sell orders. Nowadays, with the evolution of technology, it is possible to bypass all these individuals and execute a trade electronically via straight-through processing (STP). These online platforms link traders directly with liquidity pools.
Even at the interbank level, several online platforms have sprung up to automate the bank-to-bank trading process. In 1992, Reuters introduced Reuters Dealing, an online trading platform for banks. A year or so later, Icap launched their own platform called the electronic broking system, or EBS.
Both of these platforms support the major pairs, but some of the most liquid pairs are only offered by one of the platforms. The EURUSD, for example, is traded on EBS while GBPUSD trades on Reuters Dealing. Cross-currency pairs are usually not traded through these platforms, except EURJPY and EURCHF, which are traded on EBS, and EURGBP on Reuters Dealing.
6. Online retail brokers
These are usually large institutions with huge trading capital, which then enable individual investors to trade in the interbank market. Most brokers act as market makers, offering a dealing desk type of trade execution to their clients. Usually, different brokers will quote different prices to their clients, depending on where they obtain their pricing.
Since they do not trade the interbank market as commercial banks do, brokers often need to have a huge capitalization and several contacts among the banks that offer market maker services. This allows them to, in turn, quote tighter spreads to their clients. They also offer leverage to their clients who hold margin accounts.
The forex market is driven by the laws of demand and supply. Banks and other organizations that have access to large amounts of capital are some of the biggest players in this market. This is because they are capable of making significantly huge trades that influence the direction of market trends, especially when several of them make the same trade. Central banks are other huge players who regulate their local currency’s value on the forex market.