Institutions and Trading Agents
The Forex market consists of a network of dealers and traders grouped around the world. These players are linked by a system of computers, phones, and the internet.
This provides a platform where pertinent information is freely exchanged.
The Major Dealing Centers
While there is no true center, the Forex market has major dealing centers located in London, New York, and Tokyo. These are labeled ‘major centers’ because the activity in these places hold tremendous influence on the market. There are other centers labeled ‘minor centers,’ which also play a significant, albeit smaller, role in the market. These ‘minor centers’ Hong Kong, Singapore, Sydney, Frankfurt and Zurich. The 8 regions are very influential when it comes to the trading practice of the Forex market. Everyone from the daytrader to the Hedge Fund manager keeps an eye on the markets and their activities.
The majority of developed market economies have a central bank, whose role differs from country to country. Central banks play an important role in the Forex market. They try to maintain the money supply, interest rates, inflation, and other market factors. A nation’s central bank also has the fundamental responsibility of maintaining the market for its national currency. This entails monitoring and checking the prices dealt in the Forex market. Participants in the market all tend to respect the opinions of the central banks because of the power and control they have over the value of their national currency.
Both small and large banks, working for themselves and their clients (institutions, individual investors), participate in the Forex markets. According to the Bank for International Settlements, approximately 50% of all Forex transactions are strictly interbank (See Key terms section) trades. Some of the more active large banks may trade up to one billion dollars daily. And while some of this trading is done for customers, most of it is for the bank’s own account.
In the past banks relied on Forex brokers to handle their accounts in the role of middlemen, but with the emergence of technology in the Forex arena, they have been replaced by computers and other devices. Today, transactions are made by telephone with brokers or by an electronic medium, with the transaction time being between 5 and 10 seconds.
Forex market makers are the banks and brokerage companies that facilitate the 24 hour trading capabilities of the Forex market. Market makers literally “make the market” for the currencies. They ensure that the market is always functional and that the currencies in it will always obtain the market rate. To achieve this level and efficiency of trading, Forex market makers update their prices at least two times per minute allowing the trader to get the most complete up to date price and information as possible.
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Small and large companies also play an important role in the Forex market. These companies often use foreign exchange to pay for goods or services. Compared to banks and hedge funds, corporations trade less amounts of currency. Although they also do not hold the influence of banks and hedge funds, they keep the market strong through international trade and foreign currency exchange between multinational companies.
Forex fund manager are similar to money managers in the investment field. However, fund managers do business in both the domestic and international arena for individual investors, corporate pension funds, governments, and even central banks. Fund managers usually have a large pool of investments to oversee for a wide variety of clients. Dealing with hundreds of millions of dollars, they invest money across a range of countries to maximize returns.
Hedge funds have a reputation for aggressive currency speculation. Their influence in the market over the past decade has increased immensely (FXBlog). Hedge funds oversee billions of dollars of equity, and, due their tremendous borrowing power, may have rivaled the power and influence of central banks, if investments and market rends are in their favor. As opposed to banks and fund managers, hedge funds are primarily more concerned with managing the total risk of their investment pools.
Investment Management Firms
Investment management firms typically manage large accounts on behalf of corporate pension funds, trusts, charity organization and similar institutions. They use the Forex market to facilitate transactions in foreign securities. An example of an investment firm’s activity in the Forex market is given by trading markets.com: an investment manager in charge of an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases. Like hedge funds, investment firms are concerned with limiting risk (while, of course, maximizing returns).
Brokers and Electronic Brokers
The Forex broker is very similar to a stockbroker. One difference, though, is that Forex brokers only deal with banks. They, in a very efficient manner, act as the primary agent for bank transactions of the Forex market. Due to technological innovations in the market, many traditional brokering duties have been computerized, decreasing the need for human handling of the orders.
This technological takeover of the brokerage aspect of the Forex market, has led to the emergence of ‘straight through processing.’ Straight through processing is the automatic processing of an order as soon as it becomes. This has opened up Forex trading to a new, wide range of individuals and companies. Some of the most popular trading platforms include Forex.com, FXconnect, and FX Solutions. These sights, and others like them, allow Forex market participants, mostly the larger banks and corporations, to access the market directly, instead of going through a broker or a middleman, ultimately cutting costs significantly.