Participants of Foreign Exchange Market

Introduction

Forex market is the largest financial market in the world because of its huge volume. Its huge volume represents the participation and their interest in forex market. Now it is obvious through general logic that the huge volume represent participation from institutional money. Only large money can build such volume and have the ability to control the market. In general, there are multiple market participants pursuing different purposes. Their purposes in Forex Market varies from businesses purposes to speculation on price movement. There are 180 different kind of currencies and it is simply telling us that institutions from 180 different countries are contributing in forex market which results in huge volume. This writing is intended to specify who is participating in the forex market.

Participants of Foreign Exchange Market

This section of writing specifies the involvement of market participation.

Banks and Financial Institution:

• Central Banks is the first of them because they manage the prices through monetary policies and using their own currency in financial markets to influence the exchange rate of currency.
• Commercial Banks play an important role in providing liquidity. They act as market maker by quoting the Bid and ask prices. Their profitability in market varies. They trade on behalf of clients, and, at the same time, get profit from bid and ask spread.
• Development Banks in some cases may involve in Forex Markets.
• Active participation Investment Banks in Forex Market must be considered. Their participation mostly related to propriety trading, or providing services to clients.
• International organization, also known as supranational institution, indirectly involve in forex market. These institutions do not generate profit from such market, but their actions and policies sometime impact the exchange rate of currencies.

Hedge funds and Asset Manager

• Hedge Funds participation in forex market is limited to speculation on price movement and capitalize on such price movement.
• Institutional Asset Managers diversify their institutional investment portfolios. In order to diversify their investments, forex market is an additional platform for that. They also manage risk associated with currency movement by hedging.
• Insurance Companies also uses such markets for hedging currency risk.
• Asset managers manage different funds to benefit from world wide investment opportunities. These funds are Pension Funds, Endowment Funds, and Mutual Funds.

Corporations

When it comes to international trade, currency risk is the important factor to consider. In order to eliminate the associated risk, Multinational Corporations use Forex Markets (especially forward forex market) to hedge against currency risk. Importer and exporter of goods and services uses such market to hedge against currency risk.

Retail traders and Investors:

Here comes the participation of retailers who speculate on price movements. They vary from short term trader to long term investor. Most of the time, retail traders are unaware about the strategies used by professional institutions. Their simple strategies sometime trap them in bad trades. This happens because of not getting the overall image of the market.

• Retail traders are individual traders who rely on online trading platforms for trading. Their aim is to make profit form short term moves.
• Day traders in forex market rely on technical analysis of the market for capturing short term moves. They mostly employ traditional approach to market analysis, which is not encouraged by most of the trader.
• Swing trader or medium-term trend follower execute trades and let them run for days and weeks. They are patient trader and often rely on broader market perspective. They incorporate fundamental analysis to get the overall image of the market.
• Long-term retail investors also incorporate fundamental analysis in market analysis to get the overall picture of the market.

Brokers

• Forex brokers act as an intermediary between retailer and Interbank Market. participant who invests in forex market often uses Forex brokers. Some these brokers act as market make by proving liquidity to the market, and places best bid and ask prices and trade against their clients.
• Online platforms are offered by these forex brokers. These online brokers provide different types of charting tools and access to real market data. Online broker has made technical analysis easy for retail traders.

Market Makers:

With the modernization and globalization of Forex Market, the market has become more accessible and highly liquid with time. This high liquidity is the major reason where no single entity can control it. Only monetary policies of any country can affect its currency exchange rate. Positive and trade favorable polices places positive impact on country’s currency, and vice versa. Although, these policies decide long-term market movement, but modern market is an ongoing activity. In modern globalized forex market, thousands of transactions take place in a single minute. The section explains who is the market makers of current market.

• Market movement are driven by supply and demand imbalances. Bid and ask represent current market supply and demand. Market makers places the best bid and ask prices to know the current supply and demand of financial instrument. This process happens by providing liquidity to the market, and only market makers can provide liquidity to the market, because they have wide range of funds available.
• There is a price gap between bid and ask. This gap is known as bid-ask spread. The narrower the spread the higher the liquidity, and the wider the spread the lower liquidity is available in the market.
• Bid is the price the market maker is willing to pay. This represents demand. Ask is the price on which the market maker is willing to sell. This represents supply. In order to promote efficient trading in Forex Market, this is adjusted by market maker based on changes happening in market conditions.

Market maker varies from Financial Institutions to non-financial institutions. Apart from financial institutions discussed above, non-financial institutions also include proprietary firms. Competitive spreads are encouraged to attracts traders and helps traders gain confidence in their trading. The spread can be adjusted by depending upon market condition, volatility, and other factors affecting market conditions.

Concluding remarks

Rise of technology has made forex market accessible to everyone. It diversification play an important role in its increasing volume. Having the diverse knowledge of market participants puts logic in its high liquidity. Apart from Forex Market, there are other financial instruments that have little liquidity and can be easily manipulated by the smart money, or big whales. The high liquidity of Forex Market makes it difficult for smart money or any financial institution to control the price movement completely. They often rely on Fundamental analysis or order flow analysis of market for trading decision. Central banks’ decisions often influence the movement of price. Foundational knowledge of Financial Markets makes the traders confident in making decision, and makes them able to accept losses if happens in the market.

Frequently Asked Questions (FAQs)