Now that
you know the overall structure of the forex market, let's delve in a little
deeper to find out who exactly these people in the ladder are. It is essential
for you that you understand the nature of the spot forex market and who are the
main players.
Until the late 1990s, only the "big guys" could play
this game. The initial requirement was that you could trade only if you had
about ten to fifty million bucks to start with! Forex was originally intended
to be used by bankers and large institutions, and not by us "little
guys." However, because of the rise of the internet, online forex trading firms are now able to offer trading accounts to "retail"
traders like us.
Without
further ado, here are the major market players:
1. The Super Banks
Since the
forex spot market is decentralized, it is the largest banks in the world that
determine the exchange rates. Based on the supply and demand for currencies,
they are generally the ones that make the bid/ask spread that we all love (or
hate, for that matter).
These large banks, collectively known as the interbank market,
take on a ridonkulous amount of forex transactions each day for both their
customers and themselves. A couple of these super banks include UBS, Barclays Capital,
Deutsche Bank, and Citigroup. You could say that the interbank market is THE
foreign exchange market.
2. Large Commercial Companies
Companies take part in the foreign exchange market for the purpose
of doing business. For instance, Apple must first exchange its U.S. dollars for
the Japanese yen when purchasing electronic parts from Japan for their products. Since the volume they trade is much smaller
than those in the interbank market, this type of market player typically deals
with commercial banks for their transactions.
Mergers
and acquisitions (M&A) between large companies can also create currency
exchange rate fluctuations. In international cross-border M&As, a lot of
currency conversations happens that could move prices around.
3. Governments and Central Banks
Governments and central banks, such as the European Central Bank, the Bank of England, and the Federal Reserve, are
regularly involved in the forex market too. Just like companies, national
governments participate in the forex market for their operations, international
trade payments, and handling their foreign exchange reserves.
Meanwhile,
central banks affect the forex market when they adjust interest rates to
control inflation. By doing this, they can affect currency valuation. There are
also instances when central banks intervene, either directly or verbally, in the
forex market when they want to realign exchange rates. 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
"In
it to win it!"
This is
probably the mantra of the speculators. Comprising close to 90% of all trading
volume, speculators come in all shapes and sizes. Some have fat pockets, some
roll thin, but all of them engage in the forex simply to make bucket loads of
cash.
Don't worry... Once you graduate from the School
of Pipsology, you can be part of this
cool crowd! Of course, how can you be one of the cool cats if you don't even
know your forex history