How is a $ 5000 trillion a day market created?
The richest man in the world in 2019 is Jeff Bezos (Amazon) with an estimated wealth of $ 130 billion. Now imagine a place where there are exchanges, every day, of over $ 5000 billion. This is the worldwide currency market; that is, all the currency transactions in the world in one day. Their total value is over 38 times more than the wealth of the richest man in the world.
In this article, we will point out the different participants in the foreign exchange market, from an individual trader’s point of view. A perspective on the types of Forex market participants and their influence on the market helps us to better understand how currency rates change.
FX Market Participants
The participants in the forex market can be divided into several categories: from retail traders to large investment funds. Foreign exchange transactions are carried out in several locations, called exchanges or trading venues.
1. Central Banks
Their main objective is to stabilize the country’s economy, by monitoring variables such as inflation. This is achieved by regulating interest rates, intervention on the foreign exchange market (buying or selling) and regulating the mandatory minimum reserve ratio.
2. Commercial Banks & Investment Banks
They are the largest players in the Forex markets worldwide. The narrow margins of the interbank market allow transactions of huge currency values at very low costs. The high-level interbank market accounts for about 55% of all global Forex transactions.
3. Multinational Companies
These companies are participating in the Forex market mainly for hedging risks. Hedging is, in essence, a type of activity that compensates for the risk associated with currency movements.
4. Institutional Traders
It represents about 30% of all Forex transactions worldwide and includes insurance companies, pension funds, mutual funds and hedge funds. Their goals are trading for profit and hedging their global portfolios against currency risks.
5. Retail FX Brokers
They allow retail traders to access the Forex market by sending orders to commercial banks or institutional platforms. These brokers are paid from the spread or by collecting a commission for each transaction.
6. Retail Traders
They actively trade currencies, trying to take advantage of the fluctuation of one currency against another. This segment represents the fastest growth of the entire Forex market. One of the key elements that facilitated growth in this segment after the market crashes in 2008 was the ability to go long or short at any time.
