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An overview of the major players in the foreign exchange market is listed below:

Central Banks

(FOREX) markets are heavily influenced by national central banks. As central banks have large foreign exchange reserves, their intervention power is considerable. They often have official or unofficial target rates for their currencies. Their purpose is to control the money supply. 

An important responsibility of a central bank is to restore order to the market when exchange rates are volatile and to control inflation when currencies are weakening. It is often enough for the mere expectation of central bank intervention to stabilize a currency, but aggressive intervention can actually influence exchange rates in a way that is desired.

Market participants can take on a central bank if it fails to accomplish its objectives. With their combined resources, market participants could easily overpower any central bank. A number of scenarios of this nature occurred in 1992-93, during the collapse of the European Exchange Rate Mechanism (ERM), and in 1997 throughout South East Asia.

Banks

It is not uncommon for large banks to trade billions of dollars a day on the interbank market, which caters to both commercial turnover and enormous amounts of speculative trading. Bank dealers take their own positions to make profits for the bank while some of this trading activity occurs on behalf of corporate customers. However, the treasury room of a bank also conducts a lot of trading activity. 

As equity traders return to control of the Interbank market, top foreign exchange traders have lost their godlike status as the market has become increasingly competitive in the last couple of years. Traditionally, foreign exchange brokers have been adversely affected by electronic booking systems used by banks to conduct trading.

Interbank Brokers

For comparatively small fees, foreign exchange brokers were handling large volumes of business, facilitating interbank trading and matching anonymous counterparts. Due to the increased use of the Internet, many of these transactions are moving to electronic systems that function as closed circuits only for banks. 

Trading rooms still have the traditional broker box, which lets bank traders and brokers hear market prices, but turnover has decreased significantly in recent years because of the use of electronic booking systems.

Commercial Companies

A foreign exchange market’s backbone is the exposure of commercial companies to international trade. Multinational companies are exposed to foreign currency accounts receivables and payables, so they can protect themselves from unfavorable changes in foreign exchange. That’s why these markets exist. 

Commercial companies often trade in sizes that are insignificant to short term market moves, however, as the main currency markets can quite easily absorb hundreds of millions of dollars without any significant impact. Furthermore, it is evident that the overall flow of trade is a crucial factor in determining a currency’s long-term exchange rate direction. 

When very large positions are covered by multinational companies, whose exposures are unknown to the majority of investors, the effects can be unpredictable.

Retail Brokers

As a result of the Internet, we have seen a growing number of non-bank brokers offer foreign exchange trading platforms, analysis, and strategic advice to consumers. Many banks do not conduct foreign exchange trading for retail customers at all, and they lack the resources or the inclination to adequately support retail clients. 

Retail foreign exchange brokers typically provide a service-oriented approach to their clients, similar to stock and mutual fund brokers.

Hedge Funds

Recently, hedge funds have gained a reputation for aggressive currency speculation. The size and liquidity of foreign exchange markets are very appealing to some of these investment vehicles since they manage an increasing amount of money. Such a fund is also able to speculate with tens of billions of dollars at the same time due to the leverage available in these markets.

As George Soros and others squeezed the GBP out of the European Monetary System in the early 1990’s, the herd instinct was evident in hedge fund circles. 

Nevertheless, hedge funds are unlikely to succeed if the underlying investment strategy is not sound. Furthermore, hedge funds are argued to be beneficial to foreign exchange markets. By exploiting economic weakness and exposing an unsustainable financial situation, they force a country to realign itself to a more realistic level.

Investors and Speculators

As speculators take over the risks that commercial participants hedge, they play an important role in all efficient markets. The boundaries of speculation in the foreign exchange market are unclear, since many of the above mentioned players, as well as central banks, have speculative interests. Due to the leverage that can be obtained on the foreign exchange market and the liquidity with which positions can be entered and exited, foreign exchange markets are popular with investors. 

In a market with high leverage, taking advantage of interest rate differentials between two currencies is another popular strategy. The interest rate difference between two currencies in terms of exchange rates can be seen in the price of 30 day forwards, 60 day forwards, etc.

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