Unlike a stock market, the foreign exchange market is divided into levels of access known as forex market participants. At the top is the inter-bank market, which is made up of the largest commercial banks and securities dealers. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. All these together form the forex market participants. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. This is due to volume.
If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier interbank market accounts for 53% of all transactions. After that there are usually smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX market makers.
A Central Bank will intervene to buy or sell currencies if they believe it is substantially under or overvalued and that it is having a negative effect on the economy. The national central banks play a key role in the foreign exchange markets as many central banks have very substantial foreign exchange reserves, thus their intervention power is significant
Banks are licensed deposit taking institutions, they also support a variety of other services including foreign exchange. These banks will trade currencies among themselves as part of the system of balancing accounts. While exchange rates for their largest customers are extremely competitive, small and medium sized enterprises and individuals will typically pay a large premium when transacting foreign exchange with their local branch. The interbank market caters for both the majority of commercial turnover as well as enormous amounts of speculative trading every day. It is not uncommon for a large bank to trade billions of dollars on a daily basis.
Non Banking Corporations
This group comprises of companies who are involved in the ‘goods’ market, conducting international transactions for the purchase or sale of merchandise. Exporters are made up of a diverse range of companies exporting goods and services. Generally, exporters have a positive impact on the value of a country’s currency. Importers use the foreign exchange markets to purchase foreign currency to make payments for the goods and services they have bought in other countries. They generally have a negative impact on the value of a country’s currency. Their trade sizes are most often inconsequential to affect immediate moves in the market, given the large volume traded daily on the Forex market. However since a major key factor for long term trend of currency movements is the balance of trade, if taken as a whole the capital flows arising from these corporations end up having a significant impact.
Their influence has increased significantly in the last few years thanks to the overall growth in their industry and abundance of funds at their disposal; however the net effect of this group depends on the investment decisions they make. With the growth of the FX industry they have been, where possible, investing heavily in foreign securities and other foreign financial instruments.
They can classified into Interbank and Client brokers with the influence of the former declining in the last few years due o the shift of businesses to electronic trading systems. The advent of online pricing systems has revolutionized the operational capabilities of this market and changed the traditional role of brokers. But even in the past, most banks were unable to service the needs of small to medium sized organizations as well as commercial & private clients with large corporations their main targeted market. Thus keeping in mind the client’s needs ability to invest a certain amount of minimum margin and still be able to trade on competitive spreads led to the advent of Online Broking Companies and ThinkForex.com belongs to this group.
Given that the Forex market has high liquidity, a large amount of leverage and the 24/7 operational nature of the market, it has been an attractive playing field for speculators. The service provided by speculators to a market is primarily that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier for others to offset risk, including those who may be classified as hedgers and arbitrageurs.
In conclusion the above forex market participants are the ones responsible on influencing the forex fluctuations.