Business

There are various entities in the FX market arena. Each trades for its own financial objective. The following are the main FX participants.

Central Banks
Within the foreign exchange market national central banks play a very important role. Ultimately, the objective of central banks is to keep inflation low and steady by controlling money supply. One of the most important responsibilities of a central bank is the restoration of an orderly market in times of excessive currency rate
volatility.

Many times, the mere speculation of central bank intervention is enough to stabilize a currency. However, in the event of aggressive intervention the actual impact on the short term supply/demand balance can lead to the desired moves in exchange rates.

Banks
The inter-bank market provides for both the greater part of commercial turnover as well as huge amounts of speculative trading on a daily basis. The type or trading that banks do can be divided into two. First, trading on behalf of the banks customers.

Here instructions are given to the bank by the individual customer to buy or sell a specific amount of currency. The second type of trading is proprietary trading. Proprietary trading simply put is when the bank’s dealers trade the bank's capital to make the bank a profit. A very large part of interbank trading takes places on
electronic broking systems.

Interbank Brokers
Until not long ago, the foreign exchange brokers were doing large amounts of business, facilitating interbank trading and matching anonymous counterparts for relatively small fees. The increased use of the Internet has forced a lot of this business to move onto more efficient electronic systems that are functioning as a closed circuit for banks only.

The traditional broker box providing the opportunity to listen in on the ongoing interbank trading is still seen in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Customer Brokers
These type of brokers are the ones that handle the trades you will make in the forex market. These brokers are a direct result of the increased use of the internet. Their numbers are growing fast and the service they provide is becoming better and better as days go by. Forex trading has become such a lucrative business for these
brokers that they literally will do everything to acquire customers. The function of these brokers is to provide foreign exchange dealing services, analysis and strategic advice to customers. The services of such customer brokers are more similar in nature to stock, futures and mutual fund brokers and typically provide a
service orientated approach to their clients.

Commercial Companies
Companies engaged in international trade conduct a lot of their business in foreign currencies. These companies use the currency market as a means of protecting themselves from unfavorable moves in the market. A US company operating in England would receive payments for its goods or services in Great British Pounds (GBP). The company decides at one point to change the GBP for USD. This trade, from GBP to USD, is where the company's transaction forms part of the daily liquidity of the forex market.

Investors and Speculators
It is estimated that the largest portion of the daily volume in the forex market derives from investors and speculators. Simply put, this group of market participants trade with one objective in mind, making a profit from rise and fall of currency prices. These type of traders are attracted to the forex market due to the incredible leverage it provides, fantastic short and long term moves, and high
liquidity. Ten years ago this group consisted mainly on big well funded traders.

Since the internet has become more used and more efficient in terms of connection speed big traders and investors are not the only ones who can take advantage of currency speculation. The field has leveled and today’s small speculator has the same
tools big investors and speculators had 10 years ago.

Hedge Funds
Simply put, a hedge fund is a managed investment where the fund manager is authorized to use derivatives and borrowing with the aim of providing a higher return. The fund manager is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, and arbitrage.

Hedge funds have increasingly been known for aggressive currency speculation in recent years. The main reason for this is due to the high leverage, volatility and liquidity the currency market provides.