Who Participates in the Forex Market?

You might be wondering who participates in the Forex market. Well, there is a buyer, a seller, and a product to sell, what more would anyone want. Perhaps we could look at it a little differently and dig deeper to find out who exactly these people or organizations are.

The Foreign Exchange market is a world unto itself, with a variety of players, from individual traders like you, all the way up to the network of large companies, major banks, and central banks. They create the international trade of currency trading around the world that eventually becomes this massive market of currency rates.

In fact, the Forex market participants can be organized into a ladder.

Forex market participants

Fun Fact: Did you know that until the 1990s, only the “big boys” financial institutions were allowed to trade Forex? The initial requirement was that you could trade international currencies only if you had ten to fifty million bucks to start with.

Who Are the Forex Market Participants?

Without further ado, let’s dig into who really participates in the Forex market:

1. The Giant Retail and Central Banks

At the very top of the Forex market ladder are the largest banks in the world, collectively known as the interbank market or flow monsters.

These large banks are responsible for most of the trading volume in foreign exchange transactions and include banks like Citi, HSBC, UBS, JPMorgan, Barclays, Goldman Sachs, Bank of America, and Deutsche Bank.

Largest Banks in the World, Forex Market

They take on a ridiculous amount of Forex transactions each day for both their customers and themselves.

Just take a look at these statistics by Statista showing the monthly trading volume of interbank trading (usually in the spot market) in China from February 2019 to February 2020.

Oh, it is in billions.

Monthly trading volume Forex Markets

Source: Statista, 2020

Based on the supply and demand for foreign currencies, it is these bank giants that determine the bid/ask, spread  & exchange rates that we all love (and hate). Beyond that, it is a known fact that central banks also participate in the free Foreign Exchange market to control the exchange rates of their own currency, and have a huge impact on different exchange rate movements. For example, the US Federal Reserve central bank is involved in the effort to stabilize the US currency and the interest rate parity of the US exchange rate. 

2. Large Commercial Companies

Next on the ladder are the hedge funds, investment funds, corporations, retail market makers, dealing desk brokers, foreign exchange brokers, and retail ECNs.

These corporations mostly take part in the foreign exchange market for the purposes of doing business, and typically trade different currencies as speculative transactions.

For example, a large US company (say Ford) is buying exclusive car parts from a different country (say Japan), they must exchange currencies, which in this case is US dollars for Japanese Yen when purchasing the parts. Since the volume these companies trade is much smaller than those in the interbank market, they generally have to do their transactions via commercial banks through a forward contract.

This means that their rates are slightly higher and more expensive than those who are part of the interbank market.

3. Retail Traders

Individual retail investors are the smallest fish in the Forex market as they represent just 5.5% of all foreign exchange transactions. But make no mistake. Even though retail traders are at the bottom of the ladder, they are still trading large volumes of money and have an impact on exchange rates market sentiment!

For instance, the total Forex trading volume for retail forex traders in the first 3 months of 2020 was at $22.88 trillion. Crucially, they have the ability to buy and sell the same foreign currency pairs as other participants in the global Foreign exchange market.

However, they have to go through a longer transaction chain in order to get hold of liquidity, and as such, they usually don’t receive the same transaction costs as participants further up the hierarchy.

Retail traders are also unable to affect the forex markets with their trades because they are far too small to make any waves. Their role is to react to what is going on in the wider market and to position themselves accordingly.

Retail traders are focused on price fluctuations. Meaning, when a forex trader trades forex, the goal is to focus on a particular currency and search for price movements in order to make profits. Some have fat pockets, some roll thin, but all of them engage in Forex trading simply to make bucket loads of cash.

Final words – Market Participants in the Foreign Exchange Market

So, now you know who the market participants are in the forex market. As you can see, the forex market is complex and is used in various forms including global electronic trading. This is why it has become so accessible in recent years for any trader who wishes to trade currencies like the Swiss franc, New Zealand Dollar, the Australian Dollar, the Canadian Dollar, the British Pound, Euro, and many more. 

Once you graduate from the HTT Trading Academy, you might just end up joining this crowd.

But let’s not get ahead of ourselves. Next up, what is a currency pair?