A crucial part of understanding any particular market is to know the major market participants as well as the structure of the market.
With approximately $4 trillion daily transactions, the forex market is arguably the largest financial market across the globe.
But why is it not as popular as the stock market and yet it’s so big? Two factors. First, it’s not as old as such, and secondly, it only became accessible to “retail” traders just recently.
Who Trades Forex?
In the past, the major participants in forex trading were mainly the commercial banks taking positions against the other banks for various reasons such as speculation and hedging. The overall volume generated from this activity accounted for almost 70% of the forex.
However, these days, the tables have turned, and the market has changed with individual investors as well as traders able to participate.
The major reasons for participation in forex trading are:
- To profit the fluctuations in speculating and currency pairs
- Gather the profits from the rollover as a result of the differences in the interest rates
- To get protection from the fluctuating currency pairs, hedging
The following are the major forex market players;
Like any other financial market, institutional and retail traders comprise the forex market.
This category comprises of traders who use personal capital in trading the forex market.
They usually open an account with a forex broker, and they contribute about 7.5% of the total traded volume in the forex market.
Interestingly, if it were not the retail traders, the forex market would, in a high percentage, be unheard.
Retail traders can be further classified depending on their trading timeframe as swing traders, intraday traders, or just an investor. Moreover, a retail trader can either be a full-time trader or a part-time trader.
They are participants who employ the capital of a given firm to trade forex, and they represent about 92.5% of the total traded volume in the market. The institutional level firms have an enormous influence on the liquidity as well as volatility in the currency market.
The following are some of the institutional participants;
The number of banks taking part in forex trading (both small and large) is endless. All of them take part with a motive of offsetting their forex risks as well as that of clients while increasing the wealth of their stockholders.
The fact that the forex trading is decentralized, the largest banks across the globe determine the exchange rates.
Based on the supply and demand of the currencies, the “super” banks are ones responsible for making the bid/ask spread.
Some of the significant banks include JPMorgan, Citigroup, Barclays, HSBC, Deutsche Bank, Goldman Sachs, Credit Suisse, and RBS, among others.
Another major player in the forex market is the central banks. The main reason, however, for them, being involved is not the profit but rather to facilitate respective government monetary policies as well as help in smoothing out the fluctuation of the value of the respective currency.
The central banks simply adjust the interest rates to help control inflation, and by so doing, they can affect the currency valuation.
Moreover, the central banks can also intervene, either verbally or directly, when realigning the exchange rates.
The major central banks include the Federal Reserve, the Bank of England, the Bank of Japan, the Reserve Bank of Australia.
All sorts of corporations also participate in the forex market to trade goods and services, hedge risk as well as pay employees in various countries.
Commercial companies participate in the forex market to help hedge their exposure to price fluctuation.
Speculative hedge funds, as well as investment managers, make the biggest customers of banks.
They can exchange currencies for financing purchases of securities in currencies they don’t own, hedge against the risk, or speculate with fluctuations for profit.
Often, hedge funds are well-known for quick entering as well as exiting a trade – short-term speculators. Their entries are mostly based on high-impact news like NFP, inflation, retail sales, unemployment change, and GDP data.
Pension and Insurance Companies
They are the firms that aim directly at earning a profit that’s slightly above the savings rate that is offered by the banks.
Therefore, the pension, as well as insurance companies, prefers long-term trading trends in the currency pairs.
The forex market is extensive and comprises a lot of participants. The goal of each forex participant can be generating profit, hedging risk, boosting economic growth, or another purpose.
Therefore, it’s not like the equity markets, whereby participants sell or buy stocks in generating profits.