In the previous lesson, we learnt about the overall forex market structure and its hierarchy. Here, let us dig a little deeper into who exactly are the players in the market.
Until the late 1990s, Forex was initially for large banks and institutions, where only the so-called “big players” could participate. This is because the minimum requirement to trade was around fifty million US dollars.
However, with the rise of the internet, the forex brokers facilitated the “small guys” to enter into the market. These traders are usually referred to as retail traders.
Though retail traders do not move the market, they must at least know who precisely the market movers are. So, let’s discuss each one of them.
The Giant Banks
As the name quite suggests, these are the whales in the ocean of the forex market. Since the spot forex market is decentralised, it is these banks that determine the exchange rates in the market. Players
Moreover, these are the players who make up the bid/ask spreads, as the market is based on demand and supply.
These big banks are altogether known as the interbank market. They are the ones who deal with a gargantuan amount of forex transactions each day. Hence, we can more or less say that the interbank market itself is the foreign exchange market.
Some of the largest banks in the world include JPMorgan, Citi, UBS, Barclays, HSBC, and Deutsche Bank.
Large Commercial Firms
These are the companies that take part in the forex market for doing business with other countries.
For example, if Apple needs to make a purchase of components from Japan, they will have to exchange their US dollar for Japanese Yen. Hence, a huge amount of volume could create currency prices to fluctuate. And since their traded volume is lesser when compared to the interbank market, they typically deal with the commercial banks for their transactions.
Governments and the Central banks too are involved in the foreign exchange market. Just like the commercial companies, the government firms participate in the FX market for their operations, international trade payments, and for managing their Foreign Exchange Reserves.
Central banks affect the forex market when they bring a change in interest rates. Furthermore, the Central banks are so powerful that, sometimes, if they think the price of a currency is too high/low, they begin flowing colossal amount of cash to alter and stabilise the exchange rates.
These are the speculators who make up 90% of the trading volume. The opportunists include forex market players of all sizes. Their primary motive is simply to extract loads of cash from the market.
Hence, the above four are players that make up the entire forex industry.