MARKET PLAYERS
Market Players
Now that you know the overall structure of the forex market,let's dive in a little deeper to find out who exactly these people in the ladder are.It is essential for you that you understand the nature of the spot forex market and who are the main players.
Until the late 1990s,only the"big guys"could play this game.The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with! Forex was originally intended to be used by bankers and large institutions,and not by us "little guys."
However,because of the rise of the internet,online forex trading firms are now able to offer trading accounts to "retail" traders like us.
Without further ado, here are the major market players:
1.The Super Banks
Since the forex spot market is decentralized,it is the largest banks in the world that determine the exchange rates.Based on the supply and demand for currencies,they are generally the ones that make the bid/ask spread that we all love (or hate, for that matter).
These large banks,collectively known as the interbank market,take on a ridonkulous amount of forex transactions each day for both their customers and themselves.A couple of these super banks include UBS, Barclays Capital,Deutsche Bank,and Citigroup.
You could say that the interbank market is THE foreign exchange market.
2.Large Commercial Companies
Companies take part in the foreign exchange market for the purpose of doing business.For instance,Apple must first exchange its U.S. dollars for the Japanese yen when purchasing electronic parts from Japan for their products.Since the volume they trade is much smaller than those in the interbank market, this type of market player typically deals with commercial banks for their transactions.
Mergers and acquisitions (M&A) between large companies can also create currency exchange rate fluctuations.In international cross-border M&As,a lot of currency conversations happens that could move prices around.
3.Governments and Central Banks
Governments and central banks, such as the European Central Bank, the Bank of England,and the Federal Reserve,are regularly involved in the forex market too.Just like companies, national governments participate in the forex market for their operations, international trade payments,and handling their foreign exchange reserves.
Meanwhile,central banks affect the forex market when they adjust interest rates to control inflation.By doing this,they can affect currency valuation.There are also instances when central banks intervene,either directly or verbally,in the forex market when they want to realign exchange rates.Sometimes,central banks think that their currency is priced too high or too low, so they start massive sell/buy operations to alter exchange rates.
4.The Speculators
"In it to win it!"
This is probably the mantra of the speculators.Comprising close to 90% of all trading volume,speculators come in all shapes and sizes.Some have fat pockets, some roll thin,but all of them engage in the forex simply to make bucket loads of cash.
Don't worry...Once you graduate from the School of forex,you can be part of this cool crowd!
Know Your History!
At the end of the World War II,the whole world was experiencing so much chaos that the major Western governments felt the need to create a system to stabilize the global economy.
Known as the "Bretton Woods System," the agreement set the exchange rate of all currencies against gold.This stabilized exchange rates for a while,but as the major economies of the world started to change and grow at different speeds, the rules of the system soon became obsolete and limiting.
Soon enough,come 1971,the Bretton Woods Agreement was abolished and replaced by a different currency valuation system.With the United States in the pilot's seat,the currency market evolved to a free-floating one, where exchange rates were determined by supply and demand.
At first,It was difficult to determine fair exchange rates,but advances in technology and communication eventually made things easier.
Once the 1990s came along,thanks to computer nerds and the booming growth of the internet (cheers to you Mr. Al Gore),banks began creating their own trading platforms.
These platforms were designed to stream live quotes to their clients so that they could instantly execute trades themselves.
Meanwhile,some smart business-minded marketing machines introduced internet-based trading platforms for individual traders.
Known as "retail forex brokers", these entities made it easy for individuals to trade by allowing smaller trade sizes.Unlike in the interbank market where the standard trade size is one million units,retail brokers allowed individuals to trade as little as 1000 units!
Retail Forex Brokers
In the past,only the big speculators and highly capitalized investment funds could trade currencies,but thanks to retail forex brokers and the Internet,this isn't the case anymore.
With hardly any barriers to entry, anybody could just contact a broker, open up an account,deposit some money,and trade forex from the comfort of their own home.Brokers basically come in two forms:
1.Market makers, as their name suggests, "make" or set their own bid and ask prices themselves.
2.Electronic Communications Networks (ECN),who use the best bid and ask prices available to them from different institutions on the interbank market.
Market Makers
Let's say you wanted to go to France to eat some snails.In order for you to transact in the country,you need to get your hands on some euros first by going to a bank or the local foreign currency exchange office.For them to take the opposite side of your transaction,you have to agree to exchange your home currency for euros at the price they set.
Like in all business transactions, there is a catch.In this case,it comes in the form of the bid/ask spread.
For instance, if the bank's buying price (bid) for EUR/USD is 1.2000,and their selling price (ask) is 1.2002, then the bid/ask spread is 0.0002. Although seemingly small,when you're talking about millions of these forex transactions every day,it does add up to create a hefty profit for the market makers!
You could say that market makers are the fundamental building blocks of the foreign exchange market.Retail market makers basically provide liquidity by "repackaging" large contract sizes from wholesalers into bite size pieces.Without them,it will be very hard for the average Joe to trade forex.
Electronic Communications Network
Electronic Communication Network is the name given for trading platforms that automatically match customer's buy and sell orders at stated prices.These stated prices are gathered from different market makers,banks,and even other traders who use the ECN.
Whenever a certain sell or buy order is made,it is matched up to the best bid/ask price out there.
Due to ability of traders to set their own prices,ECN brokers typically charge a VERY small commission for the trades you take.The combination of tight spreads and small commission usually make transaction costs cheaper on ECN brokers.
NEXT LESSON;
NEED A TRADING ACCOUNT?CLICK THE IMAGE BELOW TO REGISTER FOR FREE.
