Who trades forex and why? In the previous article, we completed the market session, and the best time for trading, the worst time for trading.
We will continue the next lesson, about who trades forex market participants, anyone who trades forex. Also about the structure of the forex market, so stay tuned to keep up with free education with Tenkofx.co.za
Those who trade forex are those who carry out transactions in foreign currency and currency trading. Come from exchanges, financial institutions, banks, to retail traders like Uncle Juan.
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Market structure in forex in who trades forex market
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Before discussing who trades forex market participants. Learning about the structure of the forex market will at least give you new insight into how this forex market works.
To facilitate understanding of the structure of the forex market. It helps us look at the structure of the stock market first. For traders who are experienced in trading stocks, maybe they already know about this structure, look at the image below.
From the image above, we can conclude that market stocks are centralized. Meaning that the seller and buyer meet in one place called the exchange.
Market stocks tend to be manipulated, why does this happen, because in these exchanges there are specialists who tend to monopolize. This is because all traders must go through these specialists so that specialists can take action to their benefit and not to traders.
For example, in an exchange between sellers in an amount that exceeds the buyer. And this specialist is forced to complete client orders so that there is an imbalance between buyers who are less than the seller.
To prevent a surge in sellers, the specialist can take action to prevent sellers by widening spreads and increasing transaction costs to prevent sellers because seller orders are still piling up and there are no buyers yet.
In other words, this specialist will take action to manipulate the quote to accommodate the conditions needed.
Forex decentralized market in who trades forex market
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If in stock trading, you need to go to the exchange to make transactions. Unlike forex trading, you can trade anywhere, anytime, as long as you have supporting equipment and an internet connection.
It seems very pleasant for forex trading because there is no need to pay for transportation. No need to rent an office, just with a laptop or gadget you can do forex transactions even in the forest, but maybe in the forest, there is no internet signal, that’s the problem.
Unlike stock prices determined by specialist dealers, in forex there is no single price for a particular currency, thus each dealer offers a variety of quotes.
Try and pay attention to the image below
From the picture above is a decentralized market model, where there are many dealers and who offer variable prices. Every forex market participant makes transactions with each other directly or through brokers and banks, without the mediation of certain exchanges.
At a glance, the structure of the decentralized forex market seems chaotic, but actually forex traders can be described in a certain hierarchy. The forex market is very large with competition between dealers very tight, you will always get the best deals almost all the time.
When you sell, there will always be dealers who want to buy. Thus there is no monopoly in the forex market, due to the intense competition between dealers.
Of course, as a trader, this will be very encouraging, because there is no worry when selling but there are no buyers.
Forex market hierarchy in who trades forex market
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In a decentralized market, it seems chaotic, but actually we can classify it into several levels of stairs.
Look at the picture below, this is the forex market hierarchy.
At the very top of the forex market is the interbank market.
Consisting of the largest banks in the world and several smaller banks that trade among each other, prices on the interbank market are then displayed via the Electronic Brokering Service (EBS) or Reuters Dealing 3000 Matching-Spot.
EBS and Reuters Dealing 3000 Matching Spot are similar to Coca-Cola and Pepsi, they provide the same product with a thin difference.
For EBS platforms, EUR / USD, USD / JPY, EUR / JPY, EUR / CHF, and USD / CHF are more liquid.
And for the Reuters platform, GBP / USD, EUR / GBP, USD / CAD, AUD / USD, and NZD / USD are more liquid.
Underneath are hedge funds, companies, retail market makers, and retail ECNs. These companies cannot trade forex directly on the interbank market, but must first pass through the big banks.
This means that their trading costs are slightly higher and more expensive than the large banks that are part of the interbank market.
The bottom position is retail traders like us, after passing a number of institutions such as Market Maker retail brokers, ECN retail brokers, and Hedge Funds.
It used to be very difficult for us little people to get involved in the forex market, but thanks to the advent of the internet, electronic commerce, and retail brokers, the difficult obstacles to entering in forex trading are all gone.
Foreign exchange market players in who trades forex market
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We have learned about the structure of the forex market, now we will continue the next lesson about players in the forex market. You already know who the big players are in the forex market, but we will review it more deeply.
In the 1990s, only big players, big boys, could enter forex trading, because the capital for this business was between 10 million dollars and 50 million dollars.
This figure certainly will not be reached by small players, like us, so initially, this forex is only for those big boys with big capital. The development of internet technology that has provided opportunities for us, retail traders, to participate in forex trading.
We should be grateful to brokers who provide opportunities for forex trading, which is the largest market in the world.
Back to the forex market player, we try to review one by one.
Since the forex market is not centralized, the biggest banks in the world that determine the exchange rate, they determine the bid / ask price or spread in general based on demand and supply volume. How big banks trade forex, actually they only open trades 2-3 times a week.
These big banks, if we call them, are interbank markets, which carry out large amounts of foreign exchange transactions for the benefit of clients and also for their own interests.
The largest banks include Citi, JPMorgan, UBS, Barclays, Deutsche Bank, and HSBC, the interbank market can also call to be a foreign exchange market.
Large commercial companies
Large companies become part of foreign exchange because they have goals in business.
They participate in the forex market because they need foreign currencies for their trading purposes in other countries.
For example, a company based in South Africa that imports electronic goods from Japan, they need to use the foreign exchange market to buy Japanese Yen to pay.
In practice, these commercial companies still need the help of banks to be able to participate as forex market participants. Acquisitions and mergers between two large companies also allow for changes in currency prices.
Especially in cross-border mergers and acquisitions on an international scale, this can cause the volume of forex transactions to make prices move.
Government and central bank
The government and central bank are forex market participants who have an influence on the exchange rate.
The central bank can be said to be an extension of the government, which carries out policies.
And it is common knowledge that a country’s budget is very large, covering between countries and continents. So, the role of a state government is very influential in the forex market.
Each country has its own central bank, which will make policies for the behalf of the country. The central bank has the job of printing money, withdrawing money, or buying and selling its foreign money stock. Therefore, the actions of the central bank can have a very high impact.
When the central bank announces changes in interest rates, many forex traders await this momentum to buy or sell currencies as seen from the rising or falling interest rates.
Central banks make changes in interest rates with the aim of controlling inflation, adjusting the money supply by changing interest rates. Sometimes the central bank intervenes in currencies when the value of the currency is considered too high or too low, they will sell or buy a large amount of currency to get the appropriate currency’s value.
List central bank that high influence in the market
- The Federal Reserve (The Fed, United States central bank).
- Bank of England (BoE, UK central bank).
- European Central Bank (ECB, EU central bank).
- Swiss National Bank (SNB, central bank Switzerland).
- Bank of Japan (BoJ, Japanese central bank).
- Reserve Bank of Australia (RBA, Australian central bank).
- Reserve Bank of New Zealand (RBNZ, New Zealand central bank).
- People’s Bank of China (Chinese central bank, PBOC).
- Bank of Canada (BoC, Canada’s central bank).
All central banks come into play in the forex market, but the central banks are unique because their currencies include major currencies and have a large stock of funds.
Banks and other financial institutions
Banks and other financial institutions are the most active participants in the forex market. Government central banks, super large private banks, and commercial banks. However, the most influential forex market participants were multinational banks.
In every working day, banks are the most active forex market players, they carry out transactions to buy or sell foreign currencies in the interbank markets.
The price or deal that occurs determines the exchange rate of the currency. The result, it becomes as seen by traders like us in the trading platform. Because the forex market is not centralized (decentralized), it is the only common thing that one bank with another bank has a slight difference in exchange rates.
So for example in bank A offers the selling price of the euro with USD 1.1070, and the purchase price at 1.1074, and at bank B offers one euro to sell 1.1068 and to buy 1.1072.
The top10 financial institution players in the forex
- JP Morgan Chase.
- Deutsche Bank.
- Goldman Sachs.
- Morgan Stanley.
- BofA Merrill Lynch.
They deal with financial institutions or other banks to trade and buy currencies to meet their own needs and for the benefit of customers.
Because of this, the exchange rate moves up and down in the forex market.
Speculators in the financial markets
The speculators are private entities or companies engaged in the financial sector and they usually also have a large financial condition.
Speculators will try to get as much and as fast money as possible from the trading market. Maybe you have heard the name George Soros, he is a currency speculator who has earned large amounts of money in this industry. Soros speculates on the decline in the British Pound that made 1.2 billion dollars in less than a month.
So fantastic number, although this is a controversy with criticism that has blamed Soros for causing crises in several countries.
While retail traders like us also actually include currency speculators, retail trader capital is very small compared to large speculators.
Thanks to the development of technology that makes it easy for us retail traders can be part of the structure of the forex market.
Brokers for forex trading
Forex brokers are parties who provide services to traders to buy or sell currencies, this is a company that is an intermediary between traders and the interbank market.
Forex brokers are forex market players with a strategic position because they carry out and manage trading requests with small volumes (retail) to larger financial institutions.
So that later, every trader request can be accommodated in a more massive forex market.
The forex market is a type of market that is not centralized, forex market participants are those who take part in financial transactions.
Large-scale international companies, financial institutions, large banks to commercial banks, including retail traders are forex market participants.
After learning about the structure of the forex market and forex market participants, you get an insight that this market is a global market.
Source references babypips .
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