The players in the stock market differ to those who play in the foreign exchange market. The forex trading market has changed drastically over the last few years and so have the participants. In the past, only the large corporations, the central banks and other banks were allowed entry. This has changed since individual investors have been allowed to enter the market.
Normal banks play a significant part in this market. The amount of individual transactions is nowhere close to the amount of interbank transactions that take place. Banks do interbank transactions on electronic systems based on levels of credit. The larger institutions normally carry better credit relationships and this gives them the facility to obtain much more competitive foreign exchange rates. Since the smaller banks do not have the same level of credit facilities, they are unable to offer the more competitive prices available from the larger institutes.
Banks normally take on the role of dealers in the purchase and sale of foreign currencies. They make their share of the deal from the add-on to the price they had to pay for the exchange. It is due to this add-on that exchange rates for the same currency vary from bank to bank.
The main participants in this financial market are the central banks. Most countries have a central bank that is simply an arm of the government. All its policies are based on the decisions of its government. There are governments that provide their central banks with more autonomous power as they feel that the separation of the two entities is beneficial to the country. It is a good method to curb high inflation and interest rates. Regardless of whether the central bank is independent or not, it generally discusses its monetary policy with the government before any major decisions are made.
Central banks have the responsibility of maintaining certain quantities of foreign currency as a mechanism to ensure its government can meet its economic goals. These reserve levels are maintained via the foreign exchange market. This means that the central banks play a massive role in the forex market.
Corporations in the Foreign Exchange Market
The large international corporations normally deal with the large banking institutions. It does not matter if the companies are buying or selling to cover their transactions, they require forex. The foreign exchange market is used to undertake these trades. The large corporations often use the futures and forwards markets for their transactions instead of the spot market. This ensures that they are fully aware of the cost of the transaction and they can ensure that it is line with their budgets.
Speculators make up a fair section of this market. This section of the market is expanding daily as more traders enter this market with a view to taking profits. Some of the large speculators are the hedge funds. They make use of unregulated funds and unconventional methods to turn around a profit. Trades from hedge funds normally make use of risky strategies that result in massive returns on their investment.