The currency trading market differs from the equities market where investors limit their trading partners. The forex market involves participants who enter the market for very different reasons to those who enter the equities market. You need to know who these participants are and identify the reasons for their entry into this market.
Large Financial Institutions
Banking institutions are the second largest participants in the currency trading market, behind the central banks. The interbank market is used for banks to trade with each other and determines the currency price you are supplied with on your trading platform. They do these transactions electronically on brokering systems. The size of the bank determines the credit amount they have available. The larger institutions have better credit relationships with more institutions, hence the better price offerings to their clients. When it comes to pricing, the smaller banks with fewer credit facilities with other banks, offer much lower levels.
Banks act as dealers because they are prepared to purchase and dispose of currencies at the current prices. Their money is made by selling currencies on the market at a premium rate to what they obtained it. As this market is decentralized, you will be able to obtain different exchange rates from the different banks for the same currency.
Governments and Central Banks
These are the most influential participants in the currency trading market. Central banks are part of the government of a country and they work hand in hand with their governments regarding monetary policy. There are countries where the government chooses not to intervene with any decisions by the central bank. Their feeling is that an independent central bank will be more effective in maintaining low interest rates and curbing inflation. Regardless of the central bank’s independence level, government officials often maintain regular contact with the bank to give both entities the opportunity to keep abreast of monetary policies.
To meet specific economic goals of their country, central banks are often called upon to manipulate the foreign reserve levels. They enter the currency trading market to make the necessary adjustments in the reserves which they hold. Their influence in the currency market is significant because of the volume of capital they have available.
Hedgers in the Currency Trading Market
The banks’ major clients are often large corporations that deal with global foreign exchange transactions. Irrespective of whether the large corporation needs to buy or sell forex, it needs to consider the constant price fluctuations. Businesses have a couple of choices if they wish to overcome this problem. They can choose to enter the spot trading market and transact for their requirements immediately. If the cash required to do this is unavailable, they can make use of hedging strategies to lock in a specified price for an agreed upon future date. This takes away the potential risk of rate fluctuations.
Speculative Currency Trading
The speculative traders enter this market to make profits from buying and selling currencies. They make use of the fluctuation of the rates to make profits.
