Forex Market Participants

By: Justin Stewart

The foreign currency exchange, or forex as it is referred to, is composed of several categories of participants. Participants are those institutions that are actively involved in the trading of currencies in this case. The most significant difference between the operations of the stock markets versus forex is that the stock market participants all have access to the same prices of the product.

With forex, the market is divided into various levels of access. There are six different categories where levels of access are concerned as follows:

1. banks

2. commercial companies

3. central banks

4. investment management firms

5. hedge funds

6. retail forex brokers

Banks - a segment of the inter-banking market which is responsible for 53% of all forex trading taking the six groups above into consideration. The inter-bank market caters to the majority of the daily commercial traders and a large portion of the speculative investment segment of traders. Occasionally, trading is done at the behest of the customer, but most of it occurs relative to the proprietary desks trading for a bank's own accounts. Until just recently, large amounts of business involving interbank trading were conducted by foreign exchange brokers. Today, the majority of this trading is conducted using efficient electronic systems.

Commercial companies - another key part of the forex market stems from financial activities wherein commercial companies seek out foreign exchange for the purpose of purchasing goods and services. Compared to banks and investment speculators, these trades are usually of a smaller nature, therefore having an insignificant short-term impact on market rates and values. The trade flows are assessed as more important from a long-term impact standpoint.

Central banks - this segment attempts to control certain aspects of the market such as inflation, interest rates, and supply factors, and will oftentimes employ the use of both official and unofficial targeted rates for their currencies. Central banks therefore are considered to be a very important segment of the forex market because of what they have the ability of influencing.

Investment management firms - this segment manages large customer accounts, such as endowments and pension funds, on the customer's behalf. The transaction of foreign securities is facilitated using the forex market. For example, the investment managers with international equity portfolios can purchase and sell in the spot market in order to pay for the purchase of foreign equities.

Hedge funds - since 1996, hedge funds have gained a great deal of notoriety where aggressive currency speculation is concerned. If economic conditions are in the hedge funds' favor, they can literally control billions of dollars in equities and have the capability of purchasing billions more. In this situation, the intervention of a central bank to support almost any currency is overwhelmed by these hedge funds' activities.

Retail forex brokers - there are basically two types of brokers in this market --- brokers that offer immediately delivery, i.e. currencies that are purchased and then delivered to various bank accounts, and brokers that offer speculative trading. According to CNN, this segment constitutes the smallest volume factor of the six types of participants in the forex market with around $25-$50 billion in daily trading, or 2% of the total market share.

Foreign Exchange
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