When it comes down to who trades forex, the answer used to be largely confined to well-capitalized financial institutions and corporations. While such large players still dominate the forex market in terms of overall forex transaction volumes, the recent rise of online retail forex trading has made the forex market accessible to just about anyone with a computer, an Internet connection and some funds to put at risk.
The sections below examine in greater detail several types of people or institutions who trade forex and how they do so.
Large Banks and Financial Institutions
The greatest percentage of participants in the forex market in terms of transaction volume tends to fall into this category, accounting for over sixty percent of all foreign exchange transactions.
Professional traders working at these major banks and financial institutions trade for their employer’s account and also usually handle customer business and orders. Such players generally trade on credit lines that banks extend to one another in what is collectively known as the interbank forex market.
The interbank market consists of all the large banks that deal with each other and are largely responsible for the exchange rates which all other traders follow on their quote systems and trading platforms.
Also, the larger the credit network a particular bank has, the better will be its access to competitive foreign exchange rates. Having this larger network and access to the best rates enables traders at the bank to act as market makers, dealing on both sides of the bid offer spread for the bank’s benefit.
Professional Forex Market-Makers
Many large banks with a foreign exchange department will hire professional forex traders to act as market-makers to their customers and other professional interbank counterparties. They will typically make markets (two-way prices consisting of a bid and an offer price) in one or more currency pairs for their customer dealing desk and for counterparties who the bank has extended credit lines to.
Bank Forex Customers
An important type of customer that trades forex through the dealing desk of a major forex bank consists of large corporation looking to hedge against exchange rate risk. Other bank forex dealing desk customers might include financial institutions like hedge funds or wealthy individuals looking to speculate on foreign exchange rate movements or shift investment funds between countries.
Large Commercial Enterprises
Multi-national corporations that need access to the foreign exchange market in order to realize profits in their home country and to purchase raw materials abroad make up an important part of the foreign exchange market.
Importers and exporters also make use of the forex market, as well as companies which routinely operate internationally such as airlines and freight companies for example.
This type of participant generally trades currencies to protect or hedge against adverse movements in the foreign exchange market where they may have exposure.
An example of this might be a United States manufacturer which obtains key parts for their product in Japan. By trading in the forex market, with forwards and futures, the manufacturer can assure obtaining the Japanese Yen needed for the ongoing purchases at the best rates, hence hedging the risk.
Foreign Exchange Brokers
These participants generally act as intermediaries for other participants by obtaining the best possible prices for their clients in any given currency pair.
Interbank forex brokers usually profit by charging their clients a small commission on every trade. Retail forex brokers tend to either charge a commission on the number of lots traded or in the price spread by lowering the bid or raising the offer side of the market.
Governments and Central Banks
These institutions primarily participate in the foreign exchange market to intervene on behalf of their currency in the event of market instability or over or under valuation.
The central bank can intervene by buying its currency and selling foreign currency to give the currency support against other currencies. Conversely, the central bank can sell its own currency and buy foreign currencies to weaken it.
Traders and Speculators
Speculators can be anyone participating in the foreign exchange market with the intention of making a profit from directional price movements. These forex traders might include hedge funds, individual forex traders, small banks and other participants trading currencies for profit.
High net worth individuals have been able to speculate in the forex market trading in amounts of more than $1 million via banks or using currency futures for years.
Nevertheless, the relatively recent rise of retail forex trading via online forex brokers has enabled access to the forex market to speculators dealing in much smaller minimum transaction sizes or lots. Many brokers currently offer lot sizes that vary from $100,000 for standard lots, $10,000 for mini lots and down to only $1,000 for micro lots.
Some online retail traders may just use a forex trading robot to trade their personal account for them. Others might use forex trading signal subscription services or signal generating programs to give them trade ideas. Still others enjoy the fact that they can now develop their own automated trade plan with the aid of an online forex trading platform capable of supporting automated trading.