Who are the main Forex Exchange Market Participants ?
In this topic we would be understanding the role of Market Participants and how they influence the Forex Market overall, more importantly who they really are ?
Banks are the biggest and most important players in the foreign exchange market. They conduct transactions with each other but also trade on their own behalf. They also do transactions on behalf of their clients. These clients are for example export or import oriented companies which have an interest in hedging their exposure in foreign currencies.
Banks do have the biggest influence on the foreign exchange market. These were the biggest players in 2013 among the investment banks according to Greenwich Associates, a Connecticut based Research Company. As you can see there are six major investment banks accounting for more than 50 % of the market share.
Central banks – like the Bank of Japan or the Reserve Bank of Australia – participate in the foreign exchange market in order to influence their currencies, in this case the Japanese yen and the Australian dollar. In this case the market speaks of an “intervention” in the market. Especially the Bank of Japan is known for their interventions. They do not intervene on a regular basis but they do so when they consider it appropriate.
Central banks and investment banks are active in the so called „interbank market“. They conduct their transactions with each other via “EBS” (Electronic Brokering Services) or “Reuters Dealing”. Lately Bloomberg tried to get some of the market share as well but EBS and Reuters are the most important interbank platforms.
BROKERS (MARKET MAKER or ECN BROKER)
The main function of a broker is to bring buyers and sellers of currencies together. They are an intermediary between different banks as well as an intermediary between banks and private investors. For their service they charge a commission or simply charge the spread between BID and ASK.
ECN brokers (electronic communications network) usually have a smaller spread between BID and ASK but do charge a fixed commission for that. Market makers usually charge no commission but do have a slightly bigger spread. Whether you would want to trade via an ECN broker or a Market Maker depends on your trading style.
If you tend to trade smaller position sizes and like to build up your position gradually a market making broker is the more attractive solution for you. Via an ECN Broker you would have to pay the minimum commission for each part of your eventual position.
INVESTMENT FUNDS/PROPRIETARY FIRMS
These entities trade in the foreign exchange market in order to generate a return on investment for their clients. To this group of market participants belong hedge funds, pension funds, investment fund and proprietary trading firms (companies which speculate with their own money).
These are private traders who participate in the foreign exchange market for speculative purposes. If you read this you are probably part of this group.
This is what makes up the whole market to function how it does everyday, the importance of each and every participant is very crucial.
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