ARTICLE : INSTITUTIONS IN THE FOREX MARKET

INSTITUTIONS IN THE FOREX MARKET
The foreign exchange or forex market is the largest financial market in the world – larger
even than the stock market, with a daily volume of $6.6 trillion, according to the 2019
Triennial Central Bank Survey of FX and OTC derivatives markets.1 The digital site
where one currency is exchanged for another, the forex market has a lot of unique
attributes that may come as a surprise for new traders. In this article we will take an
introductory look at forex, and how and why traders are increasingly flocking toward this
type of trading.
Foreign Exchange (Forex) Definition
What Is Forex?
An exchange rate is a price paid for one currency in exchange for another. It is this type
of exchange that drives the forex market.
There are 180 different kinds of official currencies in the world. However, most
international forex trades and payments are made using the U.S. dollar, British pound,
Japanese yen, and the euro. Other popular currency trading instruments include the
Australian dollar, Swiss franc, Canadian dollar, and New Zealand dollar.
Currency can be traded through spot transactions, forwards, swaps
and option contracts where the underlying instrument is a currency. Currency trading
occurs continuously around the world, 24 hours a day, five days a week.
Who Trades Forex?
The forex market not only has many players but many types of players. Here we go
through some of the major types of institutions and traders in forex markets:
Commercial & Investment Banks
The greatest volume of currency is traded in the interbank market. This is where banks
of all sizes trade currency with each other and through electronic networks. Big banks
account for a large percentage of total currency volume trades. Banks facilitate forex
transactions for clients and conduct speculative trades from their own trading desks.
When banks act as dealers for clients, the bid-ask spread represents the bank's profits.
Speculative currency trades are executed to profit on currency fluctuations. Currencies
can also provide diversification to a portfolio mix.
Central Banks
Central banks, which represent their nation's government, are extremely important
players in the forex market. Open market operations and interest rate policies of central
banks influence currency rates to a very large extent.
A central bank is responsible for fixing the price of its native currency on forex. This is
the exchange rate regime by which its currency will trade in the open market. Exchange
rate regimes are divided into floating, fixed and pegged types.