Foreign Exchange Market Participants
The main players in the foreign exchange market differ from those in the stock market. The forex market has changed over the last few years and so have the players in the market. In the past, the larger corporations, banks and central banks were the main participants, but this has changed as individual investors have been given the opportunity to trade.
Central Banks and Governments
Federal governments and central banks are the main players in this financial market. In most global countries, central banks are a mere extension of its government and its policy is based on that of the government. There are governments that feel the separation of a central bank from its government is more beneficial in keeping the level of interest rates down and is a good mechanism to curb inflation. The independence of a central bank is irrelevant as the decisions regarding monetary policy are generally discussed with the government.
Central banks are involved in maintaining particular foreign reserve quantities to ensure the government meets its economic goals. The foreign exchange market is used to maintain these reserve levels. This allows the central banks to have a huge impact on movements within the forex market.
Foreign Exchange and Financial Institutions
Banks, along with governments and central banks, play a significant role in this financial market. Most individuals deal with local banks for foreign currency exchange. The level of individual transactions offers no competition whatsoever to the level of interbank transactions. Banks carry out interbank transactions on brokering systems where credit is required. Larger banking institutions generally have more and better credit relationships which allow them to obtain more competitive forex prices. The smaller banks have fewer interbank credit facilities which means that they cannot offer the competitive prices of the larger institutions.
Banks generally act as dealers in the buying and selling of foreign currency. They make money from the amount they add on to the price they paid for the exchange. This is the reason why the exchange rates for a particular currency may vary from one bank to another.
The larger banks often deal with large international corporations. Regardless of whether these international companies are buying or selling to international customers or suppliers, it will require foreign currency. It uses the foreign currency exchange market for this purpose. These corporations often use forwards or futures contracts, rather than the spot market, to finalise their trades. This ensures that they obtain the currency at a price suited to their budget.
Speculators are another section related to this market. This portion of the market is growing daily as more and more traders enter the market in the hope of making profits. Some of the largest speculators include hedge funds. These are unregulated funds that usually make use of unconventional methods to profit. Hedge funds trades are often based on risky strategies that could produce huge returns on the investment made. The volume of funds and the large trades that they are able to undertake can affect the economy and currency price of a country detrimentally.
These are the main players in the foreign exchange market. The volume of this market, and the liquidity linked to this volume makes it an interesting and exciting opportunity for the smaller players in the market.