One of the reasons why there is such a high level of liquidity in the forex market, even for smaller currencies, is that banks are continuously making sell orders and purchase order for currencies. When the really large banks are active on the forex market, it is not unusual for a single transaction to encompass several billion units of currency.
Examples of other significant players in the foreign exchange market are currency brokers, hedge funds, retirement funds, insurance companies, and even some large corporations whose primary business isn’t found within the financial sector. Central banks chiefly attempt to influence the pricing of currency by adjusting interest rates, not by actively engaging in large-scale currency trading, but they still do influence the market and thus count as significant players.
The interbank market
The interbank market comprises approximately 40% of all foreign exchange trade world-wide. It is not uncommon for individual transactions here to encompass several billion units of currency. The three major parts of the interbank market are the spot market, the forward market and SWIFT transactions (SWIFT = Society for World-Wide Interbank Financial Telecommunications).
The interbank market is the top level of the foreign exchange market, and this is where the major banks do their currency trading. A banks access to the market depends on the size of their “line”, i.e. how much money they are trading with.
Major banks can trade directly with each other, but using electronic broker platforms is also common. Two examples of really large electronic broker platforms utilized by major banks are Thomson Reuters Eikon and Electronic Broking Services (EBS). As of 2015, over one thousand large banks are connected to either one or both of these platforms.
At this top level of the foreign exchange market, the spread between a seller’s ask price and a buyer’s bid price tend to be extremely small compared to the spreads found at lower levels of the FX market.
Examples of large currency traders at the interbank market level
|Barclays Investment Bank||United Kingdom|
|Bank of American Merrill Lynch||USA|
|Royal Bank of Scotland||United Kingdom|
National central banks
As mentioned above, central banks usually attempt to influence the price of a currency by adjusting national interest rates, not by making currency purchases.
Exactly why and how a national bank will act varies from country to country, and also over time. In some countries, the central bank is tasked to keep the national currency stable in value against another currency. In many other countries, the currency is allowed to float against other currencies.
It should also be noted, that for many central banks of today, reach certain goals for inflation is the chief task, rather than keeping the national currency stable against other currencies. While trying to fulfill this obligation, the national central bank may carry out certain acts that eventually impacts the FX market as well.
Bureaux de change
When the average person thinks about exchanging currency, he or she probably think about the currency exchange kiosks that are available at airports, international train station hubs, and other areas where there is a large number of travelers in need of changing one currency for another. This type of business, often referred to as bureaux de change, will accept small transactions and they money they hand out typically goes to end users that intend to spend them rather than hold on to them for speculative purposes. The two most common transaction types are cash → cash or debit card /credit card → cash.
Money transfer / Remittance offices
Money transfer business, including remittance offices, typically targets individuals and small companies that need to transfer money from one country to another. In many cases, a currency conversion will take place, where currency is transferred from the local currency of the sending office to the local currency of the receiving office, although using a major currency such as USD or EUR in both ends is also common.
Even though each transfer is typically small, remittance businesses and other money transfer companies can still be pretty significant players on the FX market if their transaction volumes are large. Two examples of companies with huge transaction volumes are Western Union and UAE Exchange.
Remittance offices are typically used when a person lives and works in one country, and wants to send money to family or friends in another country (usually the sender’s country of birth). In 2014, the overall global remittance figure exceeded the equivalent of 580 billion USD, of which remittance worth approximately 436 billion USD went to developing countries.
It is not uncommon for remittance offices to also function as bureaux de change for the local population.
Companies that need to pay their bills in a foreign currency
When a company needs to pay a bill in another currency than what it’s holding, it must carry out a currency exchange. It is not unusual for a corporation to be headquarter in one country, have staff to pay in several other countries, and order goods and services from yet other parts of the world. In today’s world, with huge corporations engaged in international trade, this is clearly a part of the FX market. Even though each individual transaction of this kind tend to be small and in it self have no significant impact on the FX market, a lot of traders still try to keep an eye on the flow of currency created this way because it has been known to be an important indicator of what’s to come. Of course, if enough people believe something to be an indicator, it can turn into a self-fulfilling prophesy,
Fund managers can use FX trading is one of several methods to increase the value of the assets they have been tasked to manage. Also, fund managers may have to convert one currency into another to be able to pay for assets they wish to buy for the fund, e.g. stocks or other financial instruments.
In this group of FX players, we don’t just find traditional funds and retirement funds, but also the infamous hedge funds. The FX speculation carried out by hedge funds garnered a lot of attention in the 1990s. Hedge funds that control the equivalent of billions of USD can set things in motion that are difficult even for a national central bank to hinder, especially if there are major lenders available ready to boost the resources of a hedge fund even further.
Retail currency trade through brokers and banks
The advent of internet has helped create a situation where retail currency trade through brokers and banks online has become a growing part of the FX market. This piece of the puzzle is still small, but it is growing quickly.
Within this category, we find the subcategory “market makers”. This is a company that trades directly with the client rather than acting as a broker. Because of this, currency prices are set by the company rather than by third parties.