The main participants of the forex market. Forex Market Participants
It is conditionally possible to distinguish 2 groups of participants. Large are those who make transactions in large volumes. These include primarily commercial banks, central banks, market makers and funds. All of them can operate in billions of dollars, which will allow them to significantly influence the market.
1) Commercial banks
Commercial banks, as one of the largest participants, carry out foreign exchange transactions both in their own interests using their own funds and through speculative activities. Using their own funds and working with other banks, they form the so-called interbank foreign exchange market. Their daily turnover is billions of dollars, which allows them to make transactions in large volumes and to a large extent affects the movement of quotes and currency prices.
The most active participants among commercial banks are Deutsche Bank, Union Bank of Switzerland, Citibank, Chase Manhattan Bank, Barclays Bank, Standard Chartered Bank.
2) Market makers
Market makers are called brokerage houses that act as an intermediary between various banks, funds, dealing centers, etc. They also, like commercial banks, can offer their own prices, which makes them active market participants. Therefore, they also influence the formation of the whole. In addition, they can make transactions for the purchase and sale of currency at existing prices.
3) Central banks
Unlike commercial banks, the main goal of central banks is to regulate the currency in the foreign market in order to avoid sharp changes in the balance of exports and imports, economic crises and sharp jumps in the national currency. Central banks can directly influence prices in the form of foreign exchange intervention, or indirectly, through regulation of the money supply and interest rates. Although net profit is not the main goal of the Central Bank, they can transact through commercial banks. This allows you to influence pricing to level their risks, since they are also not interested in a loss.
The most influential central banks are: the US central bank - the Federal Reserve System (US Federal Reserve, abbr. FED, Russian Fed), the European Central Bank (ECB), the Bank of England (Bank of England, also called the Old Lady) and the Bank of Japan ( Bank of Japan).
4) Funds
Various funds participate in currency transactions: investment, pension, insurance, hedge (Investment Funds, Money Market Funds, International Corporations, etc.). All of them can carry out large operations on investing in various currencies, which ensures the maintenance of long-term trends. Their main goal is to make a profit by placing funds in securities of governments and corporations of various countries, bank deposits.
5) Firms engaged in foreign trade operations
Although they are major participants, they do not have direct access to the foreign exchange market and make conversion and deposit transactions through commercial banks. They are called large because they can offer foreign currency in large volumes, as well as provide demand for it.
6) Currency exchanges.
The main task of the currency exchanges was to determine the exchange rate and organize the rapid redistribution of foreign exchange funds. However, with the development of communication systems and the economic globalization of society, the Forex currency market began to take their place.
7) Currency dealing firms.
Their main function is to ensure interaction between the buyer and the seller in the implementation of conversion or loan and deposit transactions. In order to make transactions in the foreign exchange market with small funds, dealing firms provide private traders with the opportunity to use a loan against a security deposit, bringing the total mass of clients' funds to the market. They charge a fee for their services, usually as a percentage of the transaction amount.
8) Private individuals.
Thanks to the introduction of margin trading, individuals have the opportunity to become participants in the foreign exchange market through intermediaries - brokers or dealing centers, banks, etc. As a rule, the main goal of private traders is to make a profit through speculative operations.
Today, anyone can trade on the Forex market. However, this was not always the case. In the 90s, only large participants had access to the Forex currency market. You would need at least $10 million to be a part of this market. And the participants in this market at that time were only large banks and investors.
But with the development of the Internet, brokerage companies appeared on the market, which began to provide access to the Forex market for participants with little capital. Therefore, today anyone who wishes has access to the Forex market even with $10 in his pocket. But do not forget that the Forex market is gigantic and we, small speculators, are not alone on it, and in general, larger participants set the tone in the market.
Therefore, let's figure out who these Forex market participants are.
Forex market participants
All Forex market participants can be divided into the following groups:
Central banks of economically developed, largest countries of the world. They manage the foreign exchange reserves of their countries, regulate the levels of interest rates of the national currency and, if necessary, to maintain the required exchange rate, carry out large-scale foreign exchange interventions. The European Central Bank, the US Federal Reserve System, the Central Banks of Switzerland, Japan, and Great Britain have the greatest influence on the currency market.
International banks. As a rule, these are the largest banks in the world. The volume of operations of such banks daily is billions of dollars. Such banks include: Swiss Bank Corporation, Barclays Bank, Union Bank of Switzerland, Chase Manhatten Bank, Citibank, Deutsche Bank. Banks accumulate and serve the needs for currency conversions of the entire global currency market, attract funds from their numerous clients and enter the market with them.
Currency exchanges. The most famous and largest world exchanges are the New York, London and Tokyo currency exchanges. Thanks to telecommunications systems and modern Internet technologies, they work almost around the clock throughout the week.
Commercial banks of various countries. Carry out the bulk of all foreign exchange transactions.
International insurance companies, pension, investment, mutual funds, as well as trusts that have large portfolios of assets and manage them.
Companies engaged in foreign trade operations. They present a constant demand for foreign currency. Such organizations do not have direct access to the foreign exchange markets. They carry out their conversion operations through commercial banks.
brokerage companies. Their role is to act as an intermediary - to find and bring together a buyer and a seller of foreign currency to carry out conversion operations between them. Dealers of brokerage companies directly quote the currency with a spread, which also includes their commissions (see the basic concepts of the Forex market). The brokerage firm owns all the information about the requested rates and is, in fact, the place where the real exchange rate is formed on already concluded transactions.
Private persons. The largest group that conducts speculative transactions with currency. In addition, private individuals a large number of non-commercial foreign exchange transactions: transfers of fees, wages, pensions, sales - purchases of foreign currency, tourism.
The structure of the Forex currency market
Conventionally, the market structure can be divided into:
Market operators. The group includes large commercial banks representing the highest level of reliability. Trading with foreign exchange market operators requires large accounts. Thus, the minimum lot size for trading with operators is about 1,000,000 US dollars. Such requirements make them unattainable for a private investor.
Market makers. These are major financial firms that provide speculative trading opportunities for brokerage firms and individual traders with over $50,000 in trading capital. These are quite large and reliable companies. They offer conditions with lower trading costs, but in most cases they are not available to a private investor.
brokerage firms. As a rule, these are small firms that provide everyone with the opportunity to work in the foreign exchange market with a relatively small capital, with a deposit of hundreds of dollars to several thousand. They provide a larger spread for the client, which is their main source of income. They also earn on the process of training traders, selling trading signals, advisors, indicators and analytical materials.
Dealers. They are most often Internet brokers, whose main task is to serve the client, providing him software for transactions over the Internet and its support. Their income consists of a certain part of the spread, as agreed with the brokerage firm.
The combined activity of all players in the foreign exchange market provides it with the necessary high liquidity, and also allows it to function smoothly.
Unlike the futures market and the stock market, there are no various specialists in the Forex market who dictate and determine the market prices for various currencies. The price is set solely on the basis of the supply and demand of millions of dealers, and at any given time you get the best selling or buying price. This is what makes the foreign exchange market extremely popular and attractive, providing a constant influx of traders.
When tracking short-term fluctuations in currency pairs, it's just as easy to lose sight of general market trends as it is to overlook the broader trading ecosystem by focusing on minor fluctuations in open positions.
Forex Market is a complete world with the widest range of participants from private traders like you to interbank networks and . Acting as individual retail trader, you are at the bottom of the food chain, you are a small fish. Although you can buy and sell the same currency pairs as other participants, you still need to go through longer transaction chains than others in order to get liquidity, since you do not get the same prices as those above in the hierarchy of other market participants.
You cannot influence the market with your trades because they are too small to "make a wave". Your role here is to respond appropriately to what is happening on the market in general and with you in particular. While this may seem like a disadvantage, there are also advantages to this state of affairs. When you begin to understand exactly what events affect trends, how and why they happen, you will reach an important level as a trader. By understanding the broad structure of the market, you will be able to make the right choices and reduce the chances of random trading.
Participation of the Government and Central Banks
Central banks, such as the Fed, manage the money supply and interest rates, and oversee commercial banking systems. These are the blue whales of the foreign exchange market. As part of their remit to manage growth and currency stability, central banks provide huge impact on the forex market.
Through open market operations, central banks control money circulation and stabilize interest rates through repurchase agreements (REPO) with commercial banks (primary dealers). Repurchase agreements work effectively to increase the money supply in an economy when central banks lend funds (by buying T-bills from the banking sector) or in the case of reverse repos to take funds out of circulation during a contraction of funds (by selling T-bills to the banking sector). ).
When costs outstrip production (demand is higher than supply), prices rise, and this is called. In the face of inflation, banks also have the option of directly raising interest rates, which makes lending more expensive, as well as increasing the cost of servicing current loans, and the outlook for the lending sector becomes bleaker. When production outstrips costs (supply is higher than demand), prices fall, and this is called deflation. Faced with deflation, central banks may lower interest rates, reduce the cost of lending, which will reduce the cost of servicing current loans and brighten the prospects for lending.
What is really worth realizing is that the free market exists within a very fragile ecosystem that is kept in balance by intermittent central bank intervention. There are several reasons why central banks are at the top of the Forex food chain. Only they in the financial system can create and withdraw funds, set interest rates, influence market expectations and hold impressive foreign exchange reserves (the most popular are the US dollar and the euro). The impact that central banks can have on the Forex market as part of adjustments to their own foreign exchange reserves can be quite impressive due to the volume of transactions.
Participation of institutional dealers in the Forex market
These are banks and financial institutions; institutional dealers provide liquidity to the foreign exchange market. Dealers trade with each other in an interbank market backed by lending between participating institutions. Generally speaking, the interbank market is a chain of institutional forex dealers trading currencies with each other to maintain liquidity in the banking system. According to data collected by the Bank for International Settlements in 2013, the interbank network forms about 40% of the daily turnover of the Forex market, that is, 5.3 trillion dollars. 
Banks and large financial institutions trade with each other to make sure they have enough liquidity to meet the needs of their clients. Their clients include smaller banks without the credit relationships required to participate in the network, companies that require foreign exchange as part of their import and export cycles, forex brokers acting as intermediaries between large banks and retail traders, private clients who need access to funds and credit services. These institutions can borrow directly from central banks at wholesale prices, allowing them to access liquidity at better prices than other market participants further down the chain. Their profit comes from liquidity premiums paid by smaller institutions, companies, brokers and private clients.
prime dealers set exchange rates for traded pairs. Forex is a completely decentralized market, where there is no single price for any currency pair, and each institution has quotes that are somewhat different from others, depending on the dynamics of supply and demand. When we announce prices to our clients, we find the best bid-ask difference from our liquidity providers and fill your orders at the weighted average price after charging cTrader fees or adding a small mark-up to the spread (MT4).
As part of their monetary policy, central banks set overnight interest rates(known as the main refinancing rate in Europe and the federal funds rate in the US). Institutional dealers use these rates to borrow and lend to each other. In practice, the complex needs of the global economy mean that these rates are constantly changing. Due to varying supply and demand conditions, the actual rates for such transactions are constantly changing. This rate is known as Libor.
First of all, it must be said that there are various types of participants in the foreign exchange market. Central banks, commercial banks, investment funds, financial houses, brokerage houses and individual traders. Each participant is interested in buying low and selling high, but each participant has his own main function that he performs in the market.
Commercial banks
For commercial banks, the main function of participating in foreign exchange trading is to ensure the liquidity of their own funds and fulfill client orders, for example, orders from importing and exporting enterprises. Enterprises located in one economic zone and interested in goods or raw materials produced in another economic zone will be forced to exchange their national currency for the currency of the country in which these goods are produced. Money exchange (conversion operation) is carried out for them by commercial banks. The volume of conversion transactions is very significant and can be up to 2/3 of all daily transactions on FOREX. This fact, of course, also leads to a change in exchange rates, since the supply and demand for different currencies are in constant change.
Ultimately, the foreign exchange market is a market of interbank transactions, and, speaking subsequently about the movement of exchange rates and interest rates, one should keep in mind the interbank foreign exchange market.
In the world currency markets, the largest influence is exerted by large international banks, the daily volume of transactions of which reaches billions of dollars. These are banks such as Deutsche Bank, Barclays Bank, Union Bank of Switzerland, Citibank, Chase Manhattan Bank, Standard Chartered Bank and others. Their main difference is large volumes of transactions, which can lead to a significant change in the quote or in the price of the currency. Usually big players are divided into bulls and bears. Bulls are market participants who are interested in increasing the value of the currency; bears are market participants who are interested in lowering the value of the currency. Usually the market is in a state of equilibrium between bulls and bears, and the difference in currency quotes fluctuates within a fairly narrow range. However, when bulls or bears "take over", currency quotes change quite sharply and significantly.
Firms engaged in foreign trade operations
Companies participating in international trade show a steady demand for foreign currency (in terms of importers) and a supply of foreign currency (exporters), as well as place and attract free foreign exchange balances in short-term deposits. At the same time, these organizations, as a rule, do not have direct access to the foreign exchange market and carry out conversion and deposit operations through commercial banks.
Companies investing assets abroad (Investment Funds, Money Market Funds, International Corporations)
These companies, represented by various types of international investment funds, pursue a policy of diversified asset portfolio management by placing funds in securities of governments and corporations of various countries. In dealer slang, I simply call them funds or funds; George Soros' Quantum Fund, which conducts successful currency speculations, as well as the Dean Witter fund, are the most famous.
This type of firm also includes large international corporations that make foreign production investments: the creation of offices, joint ventures, etc., such as, for example, Xerox, Nestle, General Motors, British Petroleum and others.
Central banks
Their main task is foreign exchange regulation in the foreign market - namely, the prevention of sharp jumps in national currencies in order to prevent economic crises, maintain an export-import balance, etc. Central banks have a direct influence on the foreign exchange market. Their influence can be both direct - in the form of foreign exchange intervention, and indirect - through the regulation of the money supply and interest rates. They cannot be classified as bulls or bears, because. they can play both up and down based on the specific tasks facing them in this moment. The Central Bank can act on the market alone, to influence the national currency, or in concert with other Central Banks to conduct a joint monetary policy in the international market or for joint interventions.
The United States central bank - the Federal Reserve System (US Federal Reserve or FED for short), the central bank of Germany - the Bundesbank (Deutsche Bundesbank) and the United Kingdom - the Bank of England (Bank of England, also called Old Lady) have the greatest influence on world currency markets.
Currency exchanges
In a number of countries with economies in transition, there are currency exchanges, whose functions include the exchange of currencies for legal entities and the formation of a market exchange rate. The state usually actively regulates the level of the exchange rate, taking advantage of the compactness of the exchange market.
Currency brokerage firms
Their function is to bring together the buyer and seller of foreign currency and to carry out a conversion or loan and deposit operation between them. For their mediation, brokerage firms charge a brokerage commission as a percentage of the transaction amount.
Private individuals
Individuals carry out a wide range of non-trade operations in terms of foreign tourism, salary transfers, pensions, fees, purchase and sale of cash currency. And in 1986, with the introduction of margin trading, individuals were given the opportunity to invest free money in the FOREX market in order to make a profit.
The main volumes (90-95%) in the FOREX market are made by the world's largest commercial banks, performing conversion operations both in the interests of their clients and at their own expense. Nevertheless, progress in the field of computer technology has made it possible to find an area of application for the funds of private and often small investors in this area of finance. An increasing number of brokerage firms and banks provide private investors with access to the FOREX market via the Internet.
These are commercial banks. It is they who conduct the bulk of foreign exchange transactions at their own expense and on behalf of clients. Other participants in the foreign exchange market keep their accounts in commercial banks and send them applications for the purchase and sale of one currency for another for their own needs (conversion operations), as well as loans and vice versa keep their deposits in banks (deposit and credit operations). Banks, being specialized organizations, accumulate (through transactions with customers) the needs of the market (supply and demand) and if they are not able to satisfy these needs, they themselves satisfy them through other banks. Therefore, forex is essentially not an exchange, in the strict sense it is a market for interbank transactions (sometimes, for brevity, they say interbank). Commercial banks also carry out speculative operations at their own expense.
Firms engaged in foreign trade operations
Firms engaged in import operations present a demand for foreign currency (for the purchase of goods) and a corresponding supply of national currency. Exporting companies create a supply of foreign currency (proceeds from the sale of goods) and a corresponding demand for the national currency needed for wages, other costs and taxes. In addition, both of them place free currency balances on their accounts in deposits or securities or attract loans in various currencies, depending on interest rates and their own expectations. As a rule, all these operations are done through commercial banks.
Funds and companies making foreign investments
International investment funds, as well as large commercial corporations operating abroad, manage their own portfolio of securities (for example, government bonds and bonds of private companies) denominated in various currencies or hold large deposits in commercial banks in order to profit from such investments.
Central banks
The functions of central banks include maintaining the smooth fluctuations of the national currency, managing reserves in foreign currency, regulating refinancing rates and maintaining the liquidity of the national market. The greatest influence on the forex market is exerted by: the US Federal Reserve System (US Federal Reserve or FED), as well as its Committee on Open Market Operations (Federal Open Market Committee or FOMC), the European Central Bank (European Central Bank or ECB), the Bank of England (Bank of England - BOE, also called Old Lady), Bank of Japan (Bank of Japan or BOJ)
Currency exchanges
Currencies are also traded on domestic national exchanges. In addition, a significant part of standardized currency derivatives is traded on exchanges: futures, options, etc.
Brokerage companies
Brokerage companies are engaged in bringing together the buyer and seller of currency in the event that there are no stable counterparty agreements between them yet. For their intermediation, brokerage firms charge a brokerage commission, usually as a percentage of the transaction amount.
Dealing centers, dealing companies.
Dealing centers play the role of a kind of intermediaries, working with small amounts individuals and accumulating them for commercial banks.
Private individuals
Individuals conduct a wide range of conversion and arbitrage transactions, demand for currency for tourism purposes, buying goods abroad, converting wages, etc., and also conduct speculative transactions.