Who participates in the Forex market?

You might be wondering who participates in the forex market.

Well there is a buyer, a seller and a product to sell, what more would anyone want.

Perhaps we could look at it a little differently and dig deeper to find out who exactly these people are.

The forex market is a world unto itself, with a variety of players, from individual traders like you, all the way up to the network of large companies and central banks. In fact, the Forex market participants can be organised into a ladder.

Forex market participants

Fun fact: Did you know that until the 1990s, only the “big boys” were allowed to trade forex? The initial requirement was that you could trade only if you had ten to fifty million bucks to start with.

Without further ado, let’s dig into who really participates in the Forex market:

1. The Giant Banks

At the very top of the forex market ladder are the largest banks in the world, collectively known as the interbank market or flow monsters.

These include Citi, HSBC, UBS, JPMorgan, Barclays, Goldman Sachs, Bank of America, and Deutsche Bank.

They take on a ridiculous amount of forex transactions each day for both their customers and themselves.

Just take a look at these statistics by Statista showing the monthly trading volume of interbank trading in China from February 2019 to February 2020.

Oh, it is in billions.

daily forex trading volume
(Statista, 2020)

Based on the supply and demand for currencies, it is these bank giants that determine the bid/ask spread that we all love (and hate).

2. Large Commercial Companies

Next on the ladder are the hedge funds, corporations, retail market makers, and retail ECNs. These corporations mostly take part in the foreign exchange market for the purposes of doing business.

For example, a large US company (say Ford) is buying exclusive car parts from a different country (say Japan), they must exchange it’s US dollars for Japanese Yen when purchasing the parts.

Since the volume these companies trade is much smaller than those in the interbank market, they generally have to do their transactions via commercial banks. This means that their rates are slightly higher and more expensive than those who are part of the interbank market.

3. Retail Traders

Individual retail traders are the smallest fish in the forex sea as they represent just 5.5% of the whole foreign exchange market.

But make no mistake. Even though retail traders are at the bottom of the ladder, they are still trading large volumes of money!

Total forex trading volume for retail traders in the first 3 months of 2020 was at $22.88 trillion.

Retail traders have the ability to buy and sell the same currency pairs as other participants. However, they have to go through a longer transaction chain in order to get hold of liquidity, as such you don’t receive the same prices as participants further up the hierarchy.

Retail traders are also unable to affect the market with your trades because they are far too small to make any waves. Their role is to react to what is going on in the wider market and to position themselves accordingly.

Retail traders are focused on price fluctuations. Some have fat pockets, some roll thin, but all of them engage in the forex simply to make bucket loads of cash.

Once you graduate from the HTT Trading Academy, you might just end up joining this crowd.

But let’s not get ahead of ourselves. Click next to learn more about currencies.