Understanding the overall structure of the forex market is important. With that done, we can now focus more on the spot forex market and the players that exist within it.
For a while there, only the high rollers with millions to spend could dabble in the forex market. It wasn’t accessible to everyone.
That all changed with the advent of the internet. Now that the forex market is more accessible, it’s time to learn about the entities inside of it.
Leading off the list of forex market players are the super banks. The super banks play an essential role as they are the ones tasked with setting the exchange rates. Super banks are also responsible for creating the bid/ask spread based on the supply and demand levels for various currencies.
Collectively, the super banks form the interbank market.
You may also hear super banks sometimes referred to as flow monsters. That’s because they control a great deal of the trading flow. Their influence is undeniable given the sheer number of transactions they process daily.
Large Commercial Companies
The large commercial companies that dominate the consumer marketplace also carry great influence within the forex market.
Often, large companies get involved in the forex market because there are purchases they need to complete. They’ll exchange some of their capital for currency in the market they need and push through with a massive purchase.
Beyond their purchases, large companies can also impact the forex market through mergers and acquisitions (M&A) they complete. Whenever one of those events takes place, you can expect a noticeable shift in the market.
Governments and Central Banks
You’ll also find that governments and central banks conduct business within the forex market regularly.
Starting with the governments, you’ll most often see them doing business in forex due to their daily operational needs. They may also have to work on their foreign exchange reserves so participating in the market is a must.
Participating in the forex market is also something governments do when they need to finish international trade payments.
Central banks affect the market when they tweak interest rates. Adjusting the interest rate may be necessary for controlling inflation. When central banks do that, they also influence currency valuation.
It doesn’t happen often, but central banks also get involved in forex when they want to realign the exchange rates. They do that whenever they perceive their currency to be incorrectly valued.
Finally, are the speculators. The speculators get involved in forex for the sole purpose of making a profit.
Speculators keep a close eye on currency fluctuations, hoping to pounce on a value buy. After buying up a certain amount of currency that they feel is devalued, they will hold on to it until they can sell it for a profit.
It’s important to note that speculating is not a pure guessing game. The speculators carry out a lot of research to ascertain the likelihood they will profit from a transaction before they go through with it.
There are also no limitations on who can play the role of speculators. That’s why they contribute to 90 percent of the trading volume within the forex market.