The main participants in Forex are: banks, central banks, hedge funds, commercial companies and retail traders. The main reasons they participate in the Forex market are:

  • Profit from fluctuations in currency pairs, speculating
  • Protection from fluctuating currency pairs, derived from trading goods and services, hedging
  • Profit from rollover generated by differences in interest rates

Banks

There are hundreds of large and small banks participating in the Forex market with the motive to offset their own foreign exchange risks and that of their clients, as well as to increase wealth of their stock holders. Each bank, although differently organised, has a dealing desk responsible for order execution, market making, and risk management. The role of the dealing desk can also be to make profits trading currency directly through hedging, arbitrage, or a different array of strategies .

Central Banks

Central banks are major players in the Forex market, although the main reason they get involved is not for profit but rather to facilitate their government’s monetary policies (the supply and availability of money) and to help smooth out the fluctuation of the value of their currency (interest rates).

A central bank could intervene for the following reasons:

  • To regain price stability of an exchange rate
  • To protect certain levels of price in an exchange rate from a strong trend or imbalance
  • When economic goals need to be achieved (inflation, growth, etc.)

Businesses

Big and small corporations (from smaller importers/exporters to multi-billion, multi-national corporations) participate in Forex in order to trade goods and services abroad, hedge risk, and pay employees in different countries. Most companies like to be paid in their home currencies or US dollars in order to complete the transactions they need to acquire foreign currency through commercial banks. Another reason a commercial company may participate in the Forex market is to hedge their exposure; for instance, if the company is to receive payments in the future in its home currency, and that currency has been depreciating, the company might go short (sell) its home currency and go long (buy) the other currency in the same amount of the payment to be received, thus avoiding the risk of price fluctuation.

Hedge Funds

Hedge Funds are basically international and domestic money managers, and they can trade in hundreds of millions, as their pools of investment funds tend to be very large. The net asset value of a hedge can run into the billions, and the gross assets are higher still because of leverage and borrowing. These managers invest on behalf of a range of clients including pension funds, insurance companies, mutual funds, wealthy investors, governments and even central banks. Government-run investment pools known as sovereign wealth funds (SWF) have grown rapidly in recent years, some grabbing headline attention for making bad investments in Wall Street financial firms. All these hedge funds have played an increasingly important role in financial markets in general, and FX in particular, since the 2000’s, and it is their growth and trading activity that accounts for why over 80% of foreign exchange transactions have become speculative.

Retail Traders

We the small traders are called retail traders, as opposed to institutional traders, and though our participation in the FX market has increased dramatically in the last 10 years, we still only comprise 2% of the whole FX market volume, with an average daily trade volume of over US$50-60 billion.