t is good to know the players in the forex market who “determine” the rules of how the game will be played and at what rates.
Who are the Forex Market Players
In the beginning, you as an individual trader couldn’t have played on the forex market unless you have hard cash in your pocket. By hard cash, we mean actually BIG bucks – about 10 to 50 million bucks. It was until the late 1990s.
Forex was originally intended to be used by bankers and large institutions until the appearance of online forex brokers, who are now able to offer trading accounts to “retail” traders like us.
- The Super Banks
The forex spot market is a decentralized OTC market, so the honour goes to the largest banks in the world to determine the exchange rates.
Based on the supply and demand for currencies, they are generally the ones that make the bid/ask spread.
They are collectively known as the interbank market or also as “flow monsters“.
All these flow monsters care about is volume and capturing their share of the trading flow of currencies.
But they are not always as honest as we hope them to be!
At the heart of the problem is the so-called “London fixing”, which is calculated at the time of closing of the London market.
The price that is fixed at the last minute around 4 pm and which serves to estimate the huge amount activated, could be manipulated. Banks can make massive last-minute sales, which causes the exchange rate of a given currency to fall.
A couple of these flow monsters include Citi, JPMorgan, UBS, Barclays, Deutsche Bank, Goldman Sachs, HSBC, and Bank of America.
2. Large Commercial Companies
Companies engaged in foreign trade participate in the international foreign exchange market in order to regulate the flows of available funds, as they are exposed to currency risk.
Therefore, they must be protected from unwanted movements in the international currency market by hedging their positions.
For example, Japanese companies are major exporters to the United States and are paid in US dollars.
Naturally, if the dollar changes its rate against the yen, this will influence adversely the Japanese companies.
Since the traded volume is much smaller than those in the interbank market, this type of market player typically deals with commercial banks for their transactions.
If there is a merger between large companies, the currency exchange rate can fluctuate.
Mostly, in the case of an international cross-border merger, the prices tend to move around.
3. Governments and Central Banks
The central banks in the international foreign exchange market are the European Central Bank, the US Federal Reserve, the Central Bank of England, the Swiss National Bank and the Central Bank of Japan.
Central banks intervene in the international foreign exchange market for several reasons:
- To increase or decrease the value of their own currency, or to help another central bank do the same.
- To restructure its reserves from one currency to another.
- To reduce undesirable exchange rate fluctuations, which can lead to inflation
Sometimes, central banks think that their currency is priced too high or too low, so they start massive sell/buy operations to alter exchange rates.
4. The Speculators
The speculators are the traders. They buy and sell currency in order to make a profit later.
They try to predict which direction the exchange rates are going and benefit from it. This is called speculation.
On the other hand, there are those who don’t speculate about the price but use the market for their commercial purposes to pay for imported products or services.
Speculators are focused on price fluctuations.
There is no certainty about which currency pair’s price will go up or down.
But traders love the adrenaline of trying to predict the likelihood of either scenario before placing a trade.
Covering nearly 90% of all trading volume, speculators as forex market players come in all shapes and sizes, but they are all in for the big bucks.
You will see it by yourself.
Once you graduate from our course, you will be one of the cool players.
There is no tree without roots. If you want to know more about the roots of Forex, click on the next page.