Participants In Foreign Exchange Systems

Foreign exchange market is a major and highly liquid market in the world. This market is mainly concerned with the buying and selling of foreign currencies. However, the increase in the volume of the foreign exchange turnover indicates the increasing growth of international trade and expansion in global finance. It is important for a trader to know the major participants in foreign exchange market and how they work. Understanding what effect a certain participant's decision can have on the market is critical in decision-making enterprises.

Let’s find out the major foreign exchange participants and their roles in the exchange market.

Central banks

Central banks are one of the main players in foreign exchange market. They try to control certain aspects of the market such as inflation, interest rates, and supply factors. Moreover, they also employ the use of both official and unofficial targeted rates for their currencies. This participant in foreign exchange has large foreign exchange reserve that can be used to stabilize the market.

Commercial companies

One of the other important players in foreign exchange also includes commercial companies. This segment seeks out foreign exchange for the purpose of purchasing goods and services. As compared to banks and investment speculators, they usually trade in small amounts. Their trading activities usually have little short-term effects on the currency market rates. But in the long-term, their trade flows are important in a currency's exchange rate.

Banks

Inter-bank marketing caters majority of the commercial trading daily. Basically, trading is done on behalf of the client but mostly in its account. However, the spreads or the difference between bid and ask prices are usually sharp in this sector. Majority turnover and a truly large amount of speculative trading are due to banks and the inter-bank market. Moreover, large amounts of business involving interbank trading were conducted by foreign exchange brokers. Today, the majority of this trading is conducted using efficient electronic systems. This is the other main participants in foreign exchange online.

Investment management firms

Investment management firms are also one of the online foreign exchange participants. These firms handle big customer accounts, like endowments and pension funds, on behalf of their client. They used the foreign exchange market so as to promote security with foreign transactions. However, most of these segments have currency operation specialists that handle their client's currency exposure in order to generate profits at a minimal risk.

Hedgers or hedge funds

Hedgers or hedge funds are one of the other primary participants in foreign exchange. Basically, hedge fund comprises of private investment fund charged with a performance fee that is limitedly open to a few qualified investors to join. The strategy employed by this participant in forex trade is designed to minimize the exposure to certain unwanted business risk. At the same time it would allow profits from its investment activities. These often enter into futures, derivative or swap contracts. However, knowing the main foreign exchange participants will help you clearly understand the working of the foreign exchange market.