Foreign exchange market participants

While there are many participants in the market with diverse aims and reasons, we can typically place them into a few categories to comprehend more readily how the FX market runs.

The largest financial market in the world is the FX (foreign exchange) market. It is a daily exchange of currencies for both speculative and hedging reasons between banks, businesses, hedge funds, central banks, and private investors.

According to BIS’s most recent assessment, the OTC FX market had a daily transaction of $6.6 trillion in 2019 (up from $5.1 trillion in 2016). The US Dollar was the most traded currency, accounting for 88% of all trades. The Euro and Japanese Yen have 32% of the market share after the US dollar.

London was the most popular location for forex trading, followed by New York City, Singapore, Hong Kong, and Tokyo.

Who trades in the forex market?

The major players who are trading in the foreign currency market every day are listed below:

Commercial banks

Commercial banks are among the most significant players in the foreign exchange market. Companies not only trade on their own behalf but also give their customers a way to engage in the market. They form the foundation of the forex market and are crucial for supplying liquidity.

Commercial banks participate in the market as speculators and assist their customers with their trades. The desks are known as “proprietary trading desks,” and the prop traders aim to create a profit for the bank. After the financial crisis of 2008, banks have grown more risk-averse, and prop trading declined. Yet, it can still be found within the banks, especially in nations with less regulatory limits.

Commercial banks are amongst the best-informed market players, simply owing to the infrastructure, the quantity of cash available and maybe their understanding of the market. Commercial banks might see considerable movement coming through the market – from central banks to hedge funds and investment funds. They have a substantial advantage thanks to this knowledge.

Hedge funds

Hedge funds are the most well-known members of the group of speculators. While there are various hedge funds, the ones most active in the FX market are the global macro funds and the currency funds. Macro funds trade in numerous markets internationally, whereas currency funds are focused on possibilities in the FX market. Hedge funds are significant market participants and may manage huge positions.

The tale of how George Soros brought down the Bank of England in 1992 is certainly well-known to traders. Although the hedge fund sector has undergone significant transformation since then, they may still significantly influence the markets, particularly when several of those funds pursue the same trade. CTAs and system funds are two examples of smaller participants in this category.

Real money

The term “real money” refers to investment funds that do not employ leverage. When trading in foreign securities, these are typically pension and mutual funds that handle substantial quantities of money and do trades on the FX market. For instance, purchasing a sizable quantity of UK equities at the London Stock Exchange will necessitate the acquisition of the local currency, which in this case is the Pound Sterling.

Retail traders

Individual traders who typically enter the market through a retail broker may also utilise a prime broker if they have the appropriate money. With the modest amount of money needed to create a trading account, retail traders have access to exploit leverage.

The scale of worldwide retail trading is difficult to measure. However, according to the same study done by the Bank of International Settlements, most recently in April 2019, retail traders exchanged $201 million. Although the currency market continues to be highly alluring for individual traders, volumes have been continuously increasing, and this pattern will not soon alter.

Sovereign wealth funds

State-owned investment funds manage the nation’s money and invest it in other markets. They mainly exist in nations with huge foreign currency inflows, like Qatar from selling natural gas or Kuwait from selling oil. The transactions of sovereign wealth funds may significantly impact the FX market since they manage huge sums of money.

Prime brokers

Firms that provide other market participants with liquidity, support, and extra leverage. There are non-bank prime broker operations and the major banks’ extra bank operations. Prime brokers typically have other institutional participants as their clients. However, in some circumstances, a trader who fits the broker’s requirements may also utilise a PB.

Retail brokers

Brokerage companies that enable individual forex traders to access the FX market. These might be market makers, STP brokers, or an ECN. Market makers take the opposing side of all the client’s trades and effectively function as traders, not brokers. While an ECN enables you to trade with various participants, and the broker has no conflicts of interest at all, STP (straight-through-processing) brokers send most or all orders directly to the market.

Proprietary trading firms

Firms that employ individual traders trade the company’s money in exchange for a portion of their profits. The trader has access to professional tools that would be prohibitively expensive to buy on their own, a network of other professional traders, and capital allocation that can quickly exceed seven-figure sums for successful traders.

Money transfer/remittance companies

In the last ten years, companies that specialise in money transfers have dramatically increased their market share. Digitalization and an increase in consumer knowledge were the main drivers of this. They frequently outperform the exchange rates provided by conventional banks, and their importance is expanding, given that remittances from foreign workers significantly influence the economies of several developing nations. Typically, speculative trading is not conducted by money transfer businesses.

Among Others

  • Foreign exchange fixing
  • Commercial companies
  • Governments and central banks

Final Words

Forex is one of the largest markets in the world as it empowers everyone, from central banks to retail investors, to possibly reap profits from currency fluctuations tied to the global economy. Several strategies may be utilised to trade and hedge currencies, such as the carry trade, demonstrating how forex players affect the global economy.

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