Forex Market Players
There are various players in the Foreign Exchange (Forex) market and all of them are important in one way or the other. In this chapter, we take each one of them and check their major attributes and responsibilities in the overall Forex market.
Interestingly, internet technology has really changed the existence and working policies of the Forex market-players. These players now have easier access to data and are more productive and prompt in offering their respective services.
Capitalization and sophistication are two major factors in categorizing the Forex market players. The sophistication factor includes money management techniques, technological level, research abilities, and the level of discipline. Considering these two broad measures, there are six major Forex market players −
- Commercial and Investment Banks
- Central Banks
- Businesses and Corporations
- Fund Managers, Hedge Funds, and Sovereign Wealth Funds
- Internet-based Trading Platforms
- Online Retail Broker-Dealers
The following figure depicts the top-to-bottom segmentation of Foreign Exchange Market players in terms of the volume they handle in the market.
Commercial and Investment Banks
Banks need no introduction; they are ubiquitous and numerous. Their role is crucial in the Forex network. The banks take part in the currency markets to neutralize the foreign exchange risks of their own and that of their clients. The banks also seek to multiply the wealth of their stockholders.
Each bank is different in terms of its organization and working policy, but each one of them has a dealing desk responsible for order processing, market-making, and risk management. The dealing desk plays a role in making profits by trading currency straight through hedging, arbitrage, or a mixed array of financial strategies.
There are many types of banks in a forex market; they can be huge or small. The most sizeable banks deal in huge amounts of funds that are being traded at any instant. It is a common standard for banks to trade in 5 to 10 million Dollar parcels. The biggest ones even handle 100 to 500 million Dollar parcels. The following image shows the top 10 forex market participants.
A central bank is the predominant monetary authority of a nation. Central banks obey individual economic policies. They are usually under the authority of the government. They facilitate the government’s monetary policies (dealing in keeping the supply and the availability of money) and to make strategies to smoothen out the ups and downs of the value of their currency.
We have earlier discussed about the reserve assets. Central banks are the bodies responsible for holding the foreign currency deposits called "reserves" aka "official reserves" or "international reserves".
The reserves held by the central banks of a country are used in dealing with foreign-relation policies. The reserves value indicates significant attributes about a country’s ability to service foreign debts; it also affects the credit rating measures of the nation. The following figure shows the central banks of various European countries.
Businesses and Corporations
All participants involved in the forex market do not have the power to set prices of the currency as market makers. Some of the players just buy and sell currency following the prevailing exchange rate. They may seem to be not so significant, but they make up a sizeable allotment of the total volume that is being traded in the market.
There are companies and businesses of differing sizes; they may be a small importer/exporter or a palpable influencer with a multi-billion Dollar cash flow capability. These players are identified by the nature of their business policies that include: (a) how they get or pay for the goods or services they usually render and (b) how they involve themselves in business or capital transactions that require them to either buy or sell foreign currency.
These "commercial traders" have the aim to utilize financial markets to offset their risks and hedge their operations. There are some non-commercial traders as well. Unlike commercial traders, the non-commercial ones are considered speculators. Non-commercial players include large institutional investors, hedge funds, and other business entities that trade in the financial markets for profits.
The following figure shows some prominent businesses and corporations in Forex markets.
Fund Managers, Hedge Funds, and Sovereign Wealth Funds
This category is not involved in defining the prices or controlling them. They are basically transnational and home-country’s money managers. They may deal in hundreds of millions of dollars, as their portfolios of investment funds are often quite large.
These participants have investment charters and obligations to their investors. The major aim of hedge funds is to make profits and grow their portfolios. They want to achieve absolute returns from the Forex market and dilute their risk. Liquidity, leverage, and low cost of creating an investment environment are the advantages of hedge funds.
Fund managers mainly invest on behalf of the various clients they have, such as the pension funds, individual investors, governments and even the central bank authorities. Sovereign wealth funds that manage government-sponsored investment pools have grown at a fast rate in the recent years.
Internet-based Trading Platforms
Internet is an impersonal part of the forex markets nowadays. Internet-based trading platforms do the task of systematizing customer/order matching. These platforms are responsible for being a direct access point to accumulate pools of liquidity.
There is also a human element in the brokering process. It includes all the people engaged from the instant an order is put to the trading system till it is dealt and matched by a counter party. This category is being handled by the "straight-through-processing" (STP) technology.
Like the prices of a Forex broker's platform, a lot of inter-bank deals are now being handled electronically by two primary platforms: the Reuters web-based dealing system, and the Icap's EBS which is short for "electronic brokering system that replace the voice broker once common in the foreign exchange markets. Some online trading platforms are shown below.
Online Retail Broker-Dealers
The last segment of the Forex markets, the brokers, are usually very huge companies with huge trading turnovers. This turnover provides the basic infrastructure to the common individual investors to invest and profit in the interbank market. Most of the brokers are taken to be a market maker for the retail trader. To provide competitive and popular two-way pricing model, these brokers usually adapt to the technological changes available in the Forex industry.
A trader needs to produce gains independently while using a market maker or having a convenient and direct access through an ECN.
The Forex broker-dealers offset their positions in the interbank market, but they do not act exactly the same way as banks do. Forex brokers do not rely on trading platforms like EBS or Reuters Dealing. Instead, they have their own data feed that supports their pricing engines.
Brokers typically need a certain pool of capitalization, legal business agreements, and straightforward electronic contacts with one or multiple banks.