Who Trades Forex
Central banks & Governments:
Central banks form an integral part of an economy and work in coherence to government policies. Across major economies of the world, the central bank is responsible for deciding on the country's monetary policy. In such a scenario, foreign exchange forms an integral part of the central bank’s day-to-day operations, as to keep a sufficient amount of forex reserves for everyday transactions as well as for the sake of an emergency.
In the earlier days, the common mean of the reserve was mainly Gold bullion, but in the last 30 years, that has been replaced with U.S. Dollar reserves since it is considered the international benchmark currency for any trade or foreign exchange. Apart from the dollar, central banks also hold reserves in the form of Euro (EUR), Swiss franc (CHF), Japanese Yen (Yen), and British pound (GBP) amongst other currencies.
These reserves are sometimes used to stabilize their domestic currency or move it to the central banks desired level. Such an intervention can lead to a rise or fall in demand for the domestic currencies in the market, thus impacting inflation. Sometimes, a jawboning is taken as a preferred measure to ignite currency movements under certain circumstances.
Meanwhile, apart from the power of printing currency and having a bold say over the country’s financial health, any comments by central bank policymakers should never be ignored as they can have serious policy implications over the economy’s currency.
Commercial and investment banks
Apart from central banks and governmental authorities, commercial banks also play a significant role in trading forex. Although their scope and reach vast and broader than an individual trader, the agenda, as well as notion, is not much different – both seek to maximize their profits out of the transactions in the forex market. Irrespective of the size and scale of banks, their primary motive is not only to minimize their risks from market exposure, but also to manage the portfolios of their clients. Banks trade through their dealing desks, which is sculpted towards risk management, arbitraging, hedging, or combination of various strategies to squeeze the maximum benefits.
Among the active traders in the market, there are about 25 such banks, namely Deutsche Bank, UBS, RBS, HSBC, Merrill Lynch, Barclays, JP Morgan Chase, and smaller players such as ABN Amro and Morgan Stanley. A wide array of deals are quoted every instant, with the standard size being USD5-10 million, but the size of the orders can reach as high as USD100-500 million. These trades are made via an electronic terminal connecting to the counterparty or through phone calls.
What differentiates banks from non-banking financial organizations in this regard, is the unique access of the former in their clients’ buying and selling motives. The precious 'insider' information helps banks have an upper-hand in dealing with clients. Nevertheless, no financial institution – banks or NBFCs are not greater than the market, and any volatility in that would alter the banks’ trading as well, thus responding to volatility.
Businesses & Corporations
The third group of traders is businesses and corporations that deal with imports and exports. This is a large group and consists of small firms to multi-national firms that all participate in the currency market, as is required by the structure of their businesses.
The third group of traders is businesses and corporations that deal with imports and exports. This is a large group and consists of small firms to multi-national firms that all participate in the currency market, as is required by the structure of their businesses.
Speculators
This category of market participant takes advantage of the fluctuations in exchange-rate levels rather than hedging their Foreign exchange risk. They usually trade in huge lots, and therefore, a minor difference in the exchange rate can also sometimes yield millions of dollars in return or losses.
Hedge funds are the most controversial class of speculators, which are often engaged in using riskier and sometimes market unstable strategies to make large returns. Given this position, they tend to have a major impact on any country’s forex market. The Asian currency crisis of the late 90s has been blamed by many as the result of hedge funds, while others pointed towards the central bankers of the time. No matter what, speculators can also create a major impact on any economy under certain circumstances.