Participants in the Forex Market

The participants in the forex market are:
Banks: They are the principal players in the currency market. The role of banks in the forex market mainly encompasses:
• Employing traders to trade on the banks’ proprietary accounts to generate profits.
• Acting on behalf of customers to buy or sell currencies for commercial or trading purposes.

Central Banks: A country’s government or central bank (like the Federal Reserve in the US or the European Central Bank or ECB) participates in the forex market. The main reasons for central banks to trade currencies are:
• To protect reserves. For instance, if a central bank feels that the Euro will decline against the Japanese yen, it can exchange Euros for yens, thereby reducing its Euro holding and increasing its reserves of the yen.
• To maintain a balance in the strength/weakness of the domestic currency. For instance, if the US dollar is becoming too strong or too weak against other currencies, the Federal Reserve can buy or sell the currency.

Investment Funds and Hedge Funds: These funds invest in various financial instruments, including foreign currencies. Since the forex market is the largest in terms of trading volume, most investment and hedge funds speculate in currency value. The aim of these funds is to generate profit for their investors and they receive a percentage of the profits earned.

Companies: Firms may trade in foreign currencies due to the following reasons:
The need to pay foreign companies for goods, raw materials, services and inventory. For instance, in order to pay for a Boeing airplane, Singapore Airlines needs US dollars.
• To pay wages and salaries to people employed by their subsidiaries in other countries.
• To convert the compensation received from exports to foreign countries to the domestic currency.

Retail Forex Brokers: Individual traders can gain access to the forex market through these brokers. Brokers offer a range of benefits, including account keeping services, software to place orders and sometimes advise individual traders as well. Retail forex brokers earn money by charging a spread.

Retail Traders: Only a few years back, retail traders were prevented from participating in the forex market. With the rising popularity of the Internet, individual traders have become highly active in the forex market. Retail traders do not have direct access to the forex market and gain access through brokers. Individual traders trade using online trading platforms that provide real time data on currency prices, volumes traded and other related information.