As mentioned in the previous lesson, several actors play their role in the foreign exchange market. The main market participants are commercial banks, central banks, corporations that engage in international trade, and nonbank financial institutions such as asset-management firms and insurance companies. Foreign exchange trading among banks, called interbank trading accounts for most of the activity and volume of the foreing exchange market. We will now shortly discuss these participants.
- Commercial banks are at the center of the foreign exchange market because almost every sizable international transaction involves the debiting and crediting of accounts at commercial banks in various financial centers. Thus, the vast majority of foreign exchange transactions involve the exchange of bank deposits denominated in different currencies.
- Corporations with operations in several countries frequently exchange their currencies in the foreign exchange market, in order to make or receive payments in currencies other than that of the country in which they are headquartered.
- Nonbank financial institutions, such as mutual funds often offer to their customers services similar to those of a bank. Amongst these have been services involving foreign exchange transactions. Institutional investors such as pension funds often trade foreign currencies, and so do insurance companies and hedge funds, the latter which cater to very wealthy individuals.
- Central banks also participate in the foreing exchange market. While the size of their transactions may not be highly significant, the reason they are perceived as vital market participants is because of the influence that the macroeconomic policies published by them have on exchange rates.
- Retail traders are the least significant in terms of volume compared to the other actors on the foreign exchange market, however it is important to mention this category of participants because we fit in this classification. A retail trader is an individual who connects with a brokerage system and most likely uses his/her own capital to trade in the market, in order to gain a certain rate of return, for their personal benefit. More information on how we can participate in the foreign exchange market will be presented in the following lesson.