The foreign exchange or forex market is the biggest financial market in the whole world with regard to market cap and even the daily traded volume. With these figures being in the trillions of dollars and in the billions of dollars respectively.
As with the old adage, money goes where money is; so this vastly large financial market has naturally attracted countless players to itself. But what is interesting about forex is not merely the sheer number of participants, but also the different types of participants.
As such, in this article we want to take a look at all the different types of participants in the forex market and see how much each of them contributes to the whopping dollar figures we mentioned at the beginning of the article.
Individual Traders (Small and Large Scale)
Similar to almost all financial markets, the biggest share of participants with regard to mere numbers would be the individual traders themselves. This includes both small scale and even large scale traders.
However, even though they have number on their side, their contribution to the total market cap and trade volume is rather small and nominal, especially compared with the amount of contribution by other participants as we will see.
Furthermore, since they provide less capital than other participants in the forex market, individual traders need brokers and similar platforms to provide the leverage required to trade larger amounts.
Non-Governmental and Commercial Banking Institutions
Banks, and keep in mind we do not mean central banks, are the largest participants in the forex market with regard to the capital and assets traded in the market.
In fact, more than 75% of all the capital that is regularly traded in foreign exchange markets comes from commercial banks.
As we are going to mention the other participants in the forex market, and you will see some of them are vastly wealthy and powerful, you might be surprised why commercial banks are responsible for over three fourth of assets traded in forex.
The reason commercial banks have the biggest share of the forex market is that the regulatory frameworks in almost every single country on earth enables banks to receive deposits from their customers, not just in the form of their country’s fiat currency but also in the form of foreign currencies.
Therefore, banks can use the deposits made by their customers as leverage and bring that money into circulation in the form of trading. Of course, the most direct form of trading and investment that they can make with the currencies that have been deposited is bringing them into forex markets. Now you know who has the most money in forex and why.
Government-Backed and Central Banks
One of the biggest players and participants in the forex market are central banks. Perhaps their influence cannot be directly measured with respect to the exact amount of money. However, central banks have a great influence and power over the market. How?
Central banks set the regulatory framework for commercial banks of their own respective country. They are also in charge of printing the fiat money of that country and more importantly providing foreign currency to commercial banks.
All this leverage over commercial banks is why central banks have a great influence over the forex market. The policies set by various central banks all over the world can heavily impact the foreign exchange markets.
Governmental Bodies and Administrations
Among the other powerful participants in the forex market are actual governments and administration around the world. Such entities are also looking to make profits using the funds and assets available to them.
But they don’t merely trade to make more money or profit from trades. Government enter capital and assets in the forex markets for a very specific reason. They do so in order to protect their assets. This is a method for hedging against inflation or general falling of their country’s fiat currency.
This is why capital from various governments make up around 5% of the money traded in forex markets. Now, the value of a country’s currency may fall, as was mentioned, due to inflation and internal economic recession. But also, the decrease in value could take place as a result of external factors. So putting their country’s money, at least some of it, into forex will protect it from further loss of value.
Hedge Funds and Venture Capital Companies
It is natural that hedge funds and venture capitalists would be among the participants in the forex market. Given the fact that they have control over a vast amount of capital.
Naturally, they wouldn’t just keep it around! Hedge funds are trusted with great amount of money by individuals and institutions. They would use that money to invest in various projects, ideas, companies, businesses, and of course the forex markets.
They bring a proportion of their money into the foreign exchange market or they basically leave that money to a seasoned trader or trading company to make returns on their money.
Foreign Exchange Brokers
One of the most crucial pillars of any forex market are forex brokers. Without them, it is simply not feasible to trade in forex as easily as it is possible.
Brokers act as intermediary entities to connect individual traders to the larger market area.
Of course, they provide a wide array of services to traders. But let’s discuss two of them and see how brokers are able to bring their money into the forex markets and act as one of the biggest participants.
Firstly, they pay trading platforms in many different forms so that such platforms can be provided to the individual traders for free. This is the case, for instance, for MetaTrader trading platform which is the most popular platform as well.
Secondly, they provide leverage for individual traders. So, no matter how much money you want to enter into the forex market, you can receive leverage from brokers and be able to trade with much more than they have.
So, forex brokers can even boost the capital available to individual traders, who by the way as you remember are the biggest group of participants in the forex market.
Various Companies and Businesses
Of course different companies and businesses are also serious participants in forex markets. This is especially true of international companies, and those with various branches and offices acorns the globe. Such companies earn income in various fiat currencies and ultimately have to make numerous currency conversions for various purposes, including payment of taxes in their territory of registration.
This is who companies can benefit from forex and speculate on the price of foreign currencies given the fact that they have extensive influence and experience trading currencies.
Of course, this is not only true in the case of international companies. Even small businesses will enter some of their capital into forex market for the same reason individual traders do, to make profits with their unallocated assets.
As we established, forex is the largest financial market in the world. Therefore, forex attracts a wide range of participants to itself. This would include individual traders all the way to various financial entities such as commercial banks, central banks, companies, businesses, hedge funds, brokers, and even governments.
These different participants enter the forex market for various reasons as well. Of course the most fundamental reason would be to make profits using unallocated assets, which would have otherwise gone unused to lost their value. Another major reason is to hedge their assets against inflation and other economic downfalls.
Whatever reason they may have, many participants are currency partaking in the foreign exchange markets around the world.