Who Are The Traditional Market Participants?
The traditional forex market participants are large central
banks, Interbank brokers, hedge funds and commercial companies.
It is not uncommon for a large bank to trade billions of
dollars on a daily basis. Most of this activity is conducted by the trading
desks, where dealers trade to make the bank profits. National central banks also
play a critical role in the forex market. These central banks try to control
money supply and sometimes have target rates for their currencies. Many of these
central banks have substantial foreign exchange reserves which makes their
intervention power significant. One of the roles of a central bank is the
restoration of an orderly market in times of excessive exchange rate volatility.
They also aid in the control of the inflationary impact of a weakening currency.
Sometimes merely the expectation of central bank intervention is sufficient to
stabilize a currency. Central banks are not all powerful however, if the market
participants really want to take on a central bank the combined resources of the
market can overwhelm the banks influences. Remember, no one party can control
the forex market.
Hedge fund traders have emerged as aggressive currency
speculators in recent years. With the rate that these funds have been
increasing, the size and liquidity of the forex market is can be very appealing.
Protection against unfavorable market moves is one of the
primary reasons why this market is even in existence and commercial companies
have been part of the backbone of the forex markets. Many companies trade in
sizes that are insignificant to short-term market moves but one of the factors
that determines the long term direction of a currency’s exchange rate is the
overall trade flow.
Speculators play an increasingly more important role in the
market, taking over the risks that commercial participants don’t wish to be
exposed to. With more and more traders entering the markets each month it is
interesting to take a look at the face of today’s forex trader.
Marilyn McDonald is the director of marketing for online
broker Interbank FX. She can be reached at
marilyn@interbankfx.com .