Participants in Foreign Exchange market | Overview & Research Examples (2024)

...Chapter 3: The foreign exchange markets and major participants Now that we have an insight into the major currencies and their economies, and the important role that central banks play within an economy and the foreign exchange, or forex, markets, we now need to deepen our understanding of the forex market before we begin forex trading. We need to understand who the major players in these markets are and the types of forex markets available. Forex market participants As well as the central banks and their role in and influence on the global foreign exchange market, many other participants are involved in the trading of foreign exchange. It is important to know who these other players are, where they fit in the market and the roles they play within the foreign exchangemarket. Tip The foreign exchange, or forex, market is divided into levels of access that are determined by the size of the line, or amount of money, being traded in each transaction. The inter-bank market After the central banks, the large global commercial banks and financial institutions are the major participants in the forex market, and together they form the inter-bank market. While central bank operations in the market may be sporadic, the large commercial banks are actively involved in foreign exchange trading every day. Their trading activities add massive liquidity and volume to the market daily and are the main cause of price movement in the markets. Major international banks deal either directly with each other or through two main electronic platforms, EBS and Reuters, which offer trading in the major currency pairs. The banks regularly undertake trades worth billions of dollars on behalf of clients or, more commonly, speculateing on their own accounts. They are responsible for the majority of forex trading volume. The inter-bank market is an unregulated and decentralised wholesale market that works around the world and around the clock...

...Chapter 5: Who’s who at the FX marketplace Okay, by now you’re probably thinking that you understand the basic language, have a fair idea of the concept of free-floating currencies and you’re ready to take the plunge. But before this can happen, you need some idea of the playing field and just who the main players are. Why does foreign exchange trading exist? At the root of it all, international trade is the most obvious reason for the existence of the foreign exchange market. Importers buying goods in a foreign country need to sell their local currency and buy foreign currency to pay for the goods they have bought in the currency of the country in which they have bought them. On the other side of the trade equation, exporters will often receive payment for the goods they sell overseas in the currency of the country to which their goods have been sent. In the majority of cases, these exporters will then need to convert the foreign currency they have earned back to their local currency. As mentioned in chapter 2, the exchange of currencies from different countries and regions for the purpose of international trade can be traced back thousands of years to merchants travelling the Silk Road through Asia and trading in the bazaars of Mesopotamia. These days, with the advent of globalisation and the ever-growing cross-border trade in goods and services, international mergers and acquisitions, and 24-hour financial markets, FX transactions are even more prevalent. Three broad groups of participants Before looking too closely at exactly who is doing all the trading in the foreign exchange markets, it is helpful to have a broad view of the three major groups of participants. In very general terms, these are the inter-bank (or wholesale) entities, the clients of the wholesale entities (both retail and corporate), and the intermediaries that help bring these parties together and facilitate trade (the brokers)...

...Hedge funds, among others, are held responsible for the strong increase since 2004. But the increasing perception of foreign exchange as an asset class has also supported the strong volume growth. Market participants and reasons for transactions There are a number of different groups within banks that come into contact with foreign exchange transactions. These are primarily traders who actively trade foreign exchange. For example, they execute customer orders, act as MarketMakers or act on account of the bank. But investment companies or hedge funds have also become major players in the foreign exchange market. Some of them also speculate on exchange rate fluctuations or at least need foreign exchange in order to be able to trade securities in foreign currencies. It should be noted that a large part of the volume is concentrated in fewer and fewer banks. In Germany, for example, only four banks are responsible for around three quarters of the turnover on the foreign exchange market. Central banks also participate in ordinary currency trading. Furthermore, from time to time central banks intervene in the market with the intention of moving the exchange rate in a certain direction and correcting a supposed market disturbance. This is also known as intervention and, as a result of the central banks' market power, usually results in a violent exchange rate movement. However, studies have shown that these interventions were usually only temporarily successful. Currency market speculation The influence of classic (voice) brokers has decreased significantly in recent years, as more and more volume is traded via electronic trading platforms such as EBS...

...This aspect is unique in foreign exchange transaction, and it makes it a very complicated process. 9.1The Players By nature, the foreign exchange market (FEM) is a global market. The principal players are governments, central banks, commercial banks, other financial institutions, brokers, businesses, corporates, and individuals. The major transactions are between the commercial banks, which are authorized dealers. The central bank is an important player as it has the primary responsibility of maintaining the stability of exchange rate of the domestic currency. The stock of the latter is issued by the central bank and it is in circulation in the domestic economy. Part of this may be floating in the international market. It is the responsibility of the central bank to preserve the intrinsic value of its liability. This gives credibility to the domestic currency in the international market. It is no accident that people are reluctant to hold Australian dollar or Indonesian rupiah. Commercial banks are the providers of liquidity to the economic system, and this they do by facilitating the cash flow of currencies of multiple denominations. They hold foreign currency for this, and the portfolio of commercial bank has the important element in the form of foreign currency either as cash or as short-term monetary instruments. Trading in foreign exchange is an important source of revenue to the banks. Corporate houses enter FEM to convert their asset or liability in foreign currency into the domestic currency. The latter being the currency of the balance sheet, the corporates insulate the balance sheet position from the fluctuation of the exchange rate. Firms doing international business should pay the suppliers in the local currency in each country in which they operate. They also receive payments in different currencies from their customers...

...Some of the better known brokers include HIFX Plc, Tokyo Forex & Ueda Harlow Ltd, and Tullet Prebon. The advantage of using a broker in selling or purchasing foreign currency is that brokers are able to provide a range of quotes from different market makers. This also enables companies to keep their trades anonymous, which can be useful especially when large trades are to be executed. Usually, when the market realizes that a party is selling a large block of a currency, the price tends to get depressed. C ENTRAL B ANKS Central banks of all countries are also major players in the foreign exchange markets. Central banks have an obligation to keep their currencies stable, especially from speculators who may inject wide swings to currencies prices—a phenomenon known as volatility. To avoid excessive volatility, central banks may intervene by buying or selling foreign currencies. For example, if the Federal Reserve Board decides that the current price of dollar against the euro, say US$1.35 / €1, is weak, it can offset this imbalance by purchasing dollars from the market. If a significant amount of dollars is removed from the market, the scarce dollar will induce traders to offer fewer dollars per euro. This should result in a dollar appreciation, for example, from US$1.35 / €1 to US$1.25 /€1 to US$1.20/€1, and so on. C ORPORATIONS AND I NDIVIDUALS Another group of purchasers and sellers of foreign exchange are individuals and corporations. Corporations that export and import are active participants in the foreign exchange market. Individuals, on the other hand, are usually small-time purchasers, most often for their travels overseas as tourists. E XCHANGE R ATE R EGIMES As described earlier, the breakdown of the Bretton Woods system induced several countries to adopt a freely floating exchange rate regime. The European countries formed an alliance and adopted the European exchange rate mechanism, which required countries to manage exchange rates to reduce volatility...

...1 Introduction to the Foreign Exchange Markets International trade creates a need for buying, selling or borrowing foreign currencies. When, for example, an exporter in Japan sells goods to a customer in the US, the sale will be priced in yen, dollars, or perhaps a third currency such as sterling. •If the sale is priced in yen, the customer will purchase yen with dollars in order to make the payment. •If the sale price is in dollars, the Japanese supplier normally will wish to convert the receipts into his domestic currency, yen, and will sell dollars in exchange for yen. •If the sale price is in a third currency, such as sterling, the customer will buy sterling in exchange for dollars to make the payment and the supplier will then sell the sterling in exchange for yen. On occasion, international trade transactions do not result in the sale or purchase of foreign currency because companies either have foreign currency bank accounts for receipts and payments, or might pay for a purchase with a foreign currency bank loan. Buying and selling currencies, depositing foreign currency in a bank and currency borrowing and lending are all financial market activities that in turn support international trade. Currency is bought and sold in foreign exchange markets that are commonly referred to as FX or y Foreign currency lending and borrowing takes place in the eurocurrency markets. Together, the FX markets and the eurocurrency markets make up the foreign currency cash markets. Currencies also are traded in other forms as derivative instruments, such as currency swaps, options and futures. These are more sophisticated instruments for trading in foreign currencies that are derived from an underlying foreign exchange market or eurocurrency market transaction, and were first devised during the 1970s. The Currency Markets Exchange Rates The price at which one currency is traded in exchange for another in the FX markets is the exchange rate between the two currencies...

...Commercial banks are sometimes asked to assist their local clients with their foreign exchange risk. Investment banks tend to be more active, but this depends on the reason for their FX trading (facilitating client transactions, hedging their business exposures, cross-border issuance, international mergers and acquisitions, and even proprietary trading). Central bank activity ranges from the management of their foreign reserves through active FX market intervention. Of course, if exchange rates never moved (i.e., if they were fixed), then much of the trading activity (whether hedging or implementing views on the market) would cease. Having spelled out the economic rationale for many of the trades undertaken by the FX market participants, we now consider the possible implications of fixed exchange rates. FIXED VERSUS FLOATING EXCHANGE RATES Economists have long debated the advantages, disadvantages, virtues, shortcomings, merits, costs, and benefits of a fixed exchange rate system versus a floating exchange rate system. “Does the choice of exchange rate regime matter? Few questions in international economics have sparked as much debate and yielded as little consensus.” 6 Fixed Exchange Rates The attraction of fixed exchange rates is the presumed stability they provide for those engaging in international transactions. If USD|JPY is fixed at 120.00, then a U.S. software firm can enter into trade agreements in which their product will sell for JPY 6,000 in Japan—comfortable that they will receive USD 50 as a result of that sale. Similarly, a Japanese automobile manufacturer might sleep better knowing that their cars, selling in the United States for USD 20,000, will appear on the bottom line as JPY 2,400,000. Sounds good. The real problem, though, with fixed exchange rates is that someone must keep them fixed...

...Chapter 9 Foreign Exchange Abstract Most currencies are free to fluctuate. These have “floating” exchange rates and can be contrasted with “fixed” exchange rates which are determined and maintained by governments. Foreign exchange is traded in the spot market and the forward market. These over-the-counter markets are dominated by dealer banks trading trillions of dollars each day. Most trading is electronic on Thomson Reuters, EBS, and Bloomberg platforms. There are also exchange traded futures, options, and swaps. The theory of “purchasing power parity” states that relative exchange rates will equilibrate to the point where the price of a basket of goods in one country will equal the price of the same basket of goods in a second country. TransferWise is the most successful P2P currency exchange. Others are Xoom, WorldRemit, SettlePay, and InstaRem. Cryptocurrencies such as Bitcoin and Ethereum can also be used as a means of exchanging currency Keywords Currencies; exchange rates; Thomson Reuters; EBS; Bloomberg; purchasing power parity; law of one price; TransferWise; Xoom; WorldRemit; SettlePay; InstaRem Foreign trade has been a crucial factor in lifting global living standards, and over the centuries, trade among countries has increased dramatically. Most countries have their own currency. When countries trade goods with each other, payment is made in local currency; so there needs to be some means to value the buyer’s currency relative to the seller’s. This relative value is called the exchange rate and can be defined as the amount of one currency that needs to be exchanged in order to obtain an amount of a second currency. Three-character currency codes have been established by the International Standards Organization. The format is that the first two letters of the code refer to the country name and where possible the third character corresponds to the first letter of the currency name...