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Who Are the Major Participants in Forex Market?

Well now at the very behest you might be wondering what do I mean by participants in a market place? Well there is a buyer, a seller and a product to sell, what more would anyone want. Perhaps we can look at it a little differently, when you think of a stock market, the people who come to your mind include retail participants, stock brokers, institutional investors and perhaps even Mutual Funds. But Forex market is totally different league all together.

You have heard the term “forex market main participants” from me a lot, because they are the parties who make the currencies prices move. They are the ones who make the trade setups, because over 80% of the forex market transactions are done by them. Retail traders are responsible for less than 20% of the transactions. In general, what retail traders do has almost no impact on the price movements.

Some of the biggest stake holders in forex trade are the central banks and the Government. It is indeed overwhelming to think how a few ticks this way or that way can actually alter the money supply globally or the vice versa, how the money supply of one country can literally have a bearing on the global currency movement. Thus it becomes really important to all those who are contemplating trying out the Forex market, understand the players they would be rubbing shoulders with and competing to get a piece of the profit pie. Here is a blow by blow account of the top players in the forex world and the role they play in deciding the global currency trends.

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Central Banks

Probably the most influential players in the forex world are the central banks and the Governments they represent. More often than not you see Central Banks world executing policy matters in line with the existing Government’s political ideology, the economic demands and the steps necessary to keep the economic situation of a country in good state. The central bank’s monetary policy generally outlines the particular country’s vision for growth, how they are tackling issues like inflation/deflation and stance on interest rates. The Central Bank’s stance on interest rates is crucial as this is what determines the money supply for a country and its currency rate globally.

While many countries have strict Govt intervention while some Central Banks have relative independence in their day to day function. However they continue to be a core player in the forex market essentially to execute the Govt’s key monetary goals by maintaining the foreign reserve volumes. These concerns also make them very active stakeholders in the world of forex trades and their deep pockets ensure any move by any of these banks can bring about significant change.

Before I tell you who the other forex market main participants are, I would like to tell you something strange about the central banks. Unlike retail traders who trade to make profit, central banks don’t care about profit and loss in many of the transactions they perform, because there are some different purposes behind what they do on the forex market. For example, Bank of Japan (BOJ) has to keep the value of Japanese Yen always low, because Japan’s economy is dependent on the export of the Japanese products, and the other countries will have less tendency to order their products if the value of Japanese Yen goes high.

When the JPY value goes up, BOJ buys the other countries currencies against JPY (or sell JPY against the other currencies) to lower the JPY value. There is no doubt that they will lose a lot in this process, but they don’t care, because it is more important for them to keep the JPY value always low. This causes the other countries to keep on buying Japanese products, and so the country will make profit in long term. So, they handle losses in these transactions to keep their industries working. Not everybody trades for profit like what you do 🙂

Financial Institutions

Apart from the Government along with the Central Banks, another major player in the forex market are the Banks & Financial institutions. One of the major participants in forex transactions, banks are involved in foreign exchange transactions for a myriad of reasons. Whether it is foreign currency for business transactions, tours or personal use, banks deal with a huge amount of foreign exchange at any given time. One of the core players of the interbank market, they provide the key liquidity push in the forex market.

Financial institutions also include different kinds of individual investors as well as investment funds. Pension funds, hedge funds and money managers also form the core elements of the inter-bank market. The huge traffic of foreign exchange also ensure a strong pricing power for these institutions.

Hedgers

From banks we shift to some of the biggest clients that these banks cater to. Any big firm that is doing business internationally or is dealing with international clients will require tackling currency volatility. Be it the booming IT industry in countries like India or the energy business globally, just about nobody enjoys the currency fluctuation risk. For most multinational companies, this uncertainty is by far the key area of concern and many are working overnight to ease out the pressure as a result of this.

Here is an example to simplify the implications. Let’s assume a German company ordered a Japanese company to deliver some equipment that they make but supposing it is a long-term order and most of the payment has to be made after a year. The German company can never be sure that exact amount of Yen that they might have to pay after the end of the year and what kind of fluctuation might be seen in the some equipment from a Japanese manufacturer that needs to be paid in Yen one year from now.

Since the exchange rate can fluctuate in any direction over the course of a year, the risk of the exact Euro outgo for the German firm is a major factor to look out. Therefore it will help if the company can hedge some Euro against the Yen at the current yen rate. This will be like insurance for the company against any future loss due to a major price fluctuation. These hedging strategies are devised to lock  in specific exchange rate for future dealings.

Speculators

Now there is another set of key players in the forex market that we have thus far not discussed. They play a key role in predicting trends, attempt to profit from these predictions and the fluctuation in currency rate is what they make living out of. Yes you guessed it right, we are talking about the speculators in the money market. They bet on potential trends in future and walk the tightrope of daily fluctuation in exchange rates globally to expand their profits.

Perhaps one of the most famous speculators you would have heard about is George Soros. His shorts on the pound that earned him a billion dollars in less than a month are one of the most famous currency trades till date. The other extreme is of course Nick Leeson. He was a trader with the Barings Bank, England. He lost over a billion dollar in speculative positions on Yen futures and resulted in the actual collapse of the company.

Not just individuals but many hedge funds also get involved in speculative action. Very often these hedge funds employ risky strategies to bring about higher returns. They normally deal with very large amounts of money and given their speculative position they can at times have a major impact on the global currency move. The Asian currency crisis in the 1990s is often seen as one perpetrated by speculative action of hedge funds.

Retail Participants

The last but not the least important are the retail participants who comprise a key link in the complex labyrinth of the financial market. You have individual forex traders and corporations who are involved in regular trade of foreign currencies for personal gains and business purposes. Though they do not have a major role in deciding the trend but are some of the major players in whatever trends take shape eventually.

Thus this is a broad outline of all the leading participants who play a crucial role in the successful functioning of the forex market. Each of these players is integral to the effective functioning of the overall forex market and together they shape the structure of currency movement globally. As a trader in the forex world, it is important that you have a broad view of all these different types of stakeholders.

That will enable you to take a constructive call on the market and also help you predict the possible outcome of a key news matter better. Another important fact is an understanding of the key market participants in the forex market also gives you a bird’s eye perspective on straight forward interpretation on forex strategies.

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18 thoughts on “Who Are the Major Participants in Forex Market?
  1. Alper says:

    Hi Chris,
    What I wonder about markets u write here , another useful article …thanks

  2. Hiren says:

    Very informative….great.
    Thank you.
    Regards
    Hiren

  3. steve says:

    Hi Chris…thanks for yet another amazing article…i now see the bigger picture on what you’ve been teaching us..that the strong trade set ups show what the big players are doing….by the way am still in demo mode and its going great.

  4. Singh says:

    Indeed very informative

  5. Ted says:

    Thanks Chris

    Great read!

  6. Andy C says:

    Very usefull and great Arcticles sir..
    may i ask how a man George Soros could make a country Bankrupt…??

    Andy

    • Chris says:

      Hi Andy,

      He is not just a trader. He has some other activities too.

    • Richard says:

      Hi Andy, Soros didn’t do all it by himself. He coroperate with other hedge fund/speculator to attack the BoE, it took few months for that to happen. He spent alot of effort in doing that.

  7. shinchan says:

    this articale was very much helpful.. anyway All contents and materials of this website is very much helpful for any trader.. its very clear view of all the aspects of market..
    many thanks for this..

  8. DaVid says:

    Hi Chris,

    Thank you for your article but I still don’t know who really touch to make price moves?

    Thank you.

  9. samer antary says:

    Thank you for exposing the content of the black box

  10. Hosea Tumewu says:

    So people like George Soros & Nick Leeson isn’t categorized as retail traders like us? who’s trying to make a profit out of market movements ? Is it because they trade with a huge amount of money ?

  11. Pedro Daniel says:

    What about multinational companies exporting grains?. The big boys can trade billions in a given month only. Aren’t they a player in this ?

    • Pedro,

      They are not traders, but they do trade and have a role in currency market. I mean, they don’t buy/sell currencies against each other for the purpose of making profit. They do it because of the necessary transactions they have to have to do their exporting.

  12. titanium says:

    Hi Chris, great article. What is the difference between a retail trader and an istitutional trader? If you trade big aumount of money with an ECN broker, are you an istitutional trader or a rentail one? Can ECN broker be istitutional broker, or are the banks the only companies considered “istitutional”? Thank your for your great help.

    • Titanium,

      Institutional traders are the ones who trade for the hedge funds and banks. Retail traders are those who trade from home for themselves and with their own money.

      If a bank offers brokerage services, then it is an institutional broker.

  13. Abta Cas says:

    This man is so well informed,l always make sure i read at list one article each day,l just love this,everything is just simplified.