Central Banks: National Central Banks are an important part of the FOREX markets. Central Banks attempt to control money supplies. These Banks often have their official or unofficial currency target rates. Since many central banks have very substantial foreign exchange reserves. They have significant intervention power.
Some of the most important responsibilities of Central Banks is the restoration of an orderly market. Especially during excessive exchange rate volatility. And the control of the inflationary impact of a weakening currency. Oftentimes, the bare expectation of Central Banks’ intervention. Is enough to stabilize a currency,
Though in case of aggressive intervention. The impact on the short-term supply/demand balance. Can cause desired moves in exchange rates. If the Central Banks do not achieve their objectives. FOREX market traders can compete against a Central Bank. The truth is that the combined resources of the market participants. Could easily overwhelm any Central Bank despite their financial power.
Several such examples were seen in the 1990s. In 1992-1993 with the European Exchange Rate Mechanism (ERM) collapse. And also in 1997 throughout South East Asia.
Banks: The Interbank FOREX market caters to the majority of commercial turnover. As well as enormous amounts of speculative trading. It is very common for even just a single large Bank to trade billions of dollars a day. Some of this trading activity is carried out on behalf of corporate customers.
But a Bank’s Treasury Room also engages in large volumes of trading. In which Bank’s traders are placing their own positions to earn profits for the bank. The Interbank market has become increasingly competitive in recent years. And the best top FOREX traders have suffered. As equity traders are again back in charge.
A big part of the Banks’ trading with each other is taking place on electronic booking systems. These systems have negatively affected traditional foreign exchange brokers.
Interbank Brokers: Until recently, FOREX brokers were doing large amounts of business. Making Interbank trading easier and matching anonymous counterparts. And for comparatively small fees. With the increased use of the Internet. Much of this business is moving onto more efficient electronic systems. Which act as a closed circuit for Banks only.
The traditional “Broker Box”, allowing Bank traders and Brokers to hear market price quotes. Still takes place in some trading rooms. Though turnover is noticeably smaller than several years ago. Due to the increased use of electronic trading systems.
Commercial Companies: Commercial companies’ international trade exposure is the foundation of the FOREX markets. Multinational companies have exposure in accounts. Both receivables and payables denominated in foreign currencies. They can be protected against disadvantageous foreign exchange moves. That is why these markets are in existence.
Commercial companies often trade in small lot sizes. Which are not important to short term market fluctuations. However, as the main currency markets can easily absorb 100s of millions of dollars. All without any big impact. It is also a fact that one of the decisive factors. Influencing the long-term direction of a currency’s exchange rate. Is the actual overall trade flow.
Some multinational companies with uncommonly known exposures. Can cause unpredictable impacts when very large positions are covered.
Retail Brokers: The mass introduction and expansion of the Internet has created a host of retail brokers. These types of brokers provide FOREX dealing platforms (terminals). Including market analysis and strategic advice to their customers.
The fact is many Banks don’t provide FOREX trading for retail customers at all. And lack the necessary resources or inclination to adequately support retail-level clients.
The services Retail FOREX Brokers are similar to Stock and Mutual Fund Brokers. Typically providing a service-orientated approach to their clients.
Hedge Funds: Hedge funds are known for aggressive currency speculation. With the increasing amount of money. Some of these investment funds possess under management. The size and liquidity of FOREX markets can be very appealing. The high leverage available in these markets also allows such funds. To speculate with several billions of money at a time.
The “herd instinct” that is very apparent in hedge fund circles was seen during the early 1990s. With George Soros and others pushing the Great British Pound out of the European Monetary System.
However, such investments would unlikely to be successful. If the underlying investment strategy was flawed. It is also believed that Hedge Funds actually perform a beneficial service to FOREX. They are able to exploit economic weakness and to expose a country’s unsustainable financial plight. Forcing realignment to more realistic levels.
Investors and Speculators: In all efficient markets, the speculator has an important part. In taking over the risks that a commercial participant hedges. The boundaries of speculation in the foreign exchange market are uncertain. Due to several of the mentioned participants also having speculative interests. Even the Central Banks.
FOREX is popular with investors due to a large amount of leverage that can be obtained. Including the liquidity with which positions can be entered and exited. Profiting from two currencies interest rate differentials. Is another popular strategy. It can be efficiently deployed in a high-leverage market.