The Participants in the Foreign Exchange Market

A novice trader should know who are the entities who participate in the forex market. Understanding what effect a certain sector or participant's decision can have on the market is critical in decision-making enterprises. Let's take a look at the different entities that play major roles in the forex market.

Hedgers or Hedge Funds are one of the primary participants in the currency exchange market. They are primarily businesses or other organizations that participate in international trade. These usually charge performance fees. Only a limited number of investors are able to participate in hedge funds. The strategy employed by this participant in forex trade is designed to minimize the exposure to certain unwanted business risk. At the same time it would allow profits from its investment activities. These often enter into futures, derivative or swap contracts.

This group of participants has grown from 2001-2004. That growth has included the number of hedgers and the overall size of the participants.

Banks are another group of entities that participate in the forex market. The inter-bank market is made up of the largest investment banking firms in a particular country. The spreads or the difference between bid and ask prices are usually sharp in this sector. Majority turnover and a truly large amount of speculative trading are due to banks and the inter-bank market.

Commercial companies are another important group of participants in this market. They usually trade small amounts compared to the trade volume of banks or speculators. Their trading activities usually have little short-term effects on the currency market rates. But in the long-term, their trade flows are important in a currency's exchange rate.

A country's central bank plays a very critical role as a participant in the market. A central bank controls money supply, interest rates, and inflation. This participant has a huge foreign exchange reserve that can be used to stabilize the market. Some governments give control to their central banks regarding the monitoring of target rates for their country's currency. At times central banks would intervene in the forex market.

Central banks may not always achieve their target rates. Often enough when the resources of a certain market would be combined it may easily overwhelm any central bank's efforts. Scenarios like this have been observed in Southeast Asia in more recent times.

Investment management firms are businesses that manage large accounts in behalf of customers. Its customers include pension funds and endowment and other entities. This participant often uses the forex market to transact in foreign securities. Investment management firms do not usually aim for profit maximization because their currency market transactions are only secondary in nature to the actual investment decisions made.

95% of the market is made up of speculators. This group of participant includes private individuals, corporations, some banks, and even public entities. These participate in the currency exchange mainly to make profit. These take advantage of fluctuations in both the exchange rates and in the interest rates.

The forex market involves different participants who play different parts in market movement. Seeing how these participants affect the general mood or behavior of the market would provide a particular decision making leverage to a trader.