The modern forex market is incredibly complex with numerous classes of players participating for very different reasons: facilitating trade, performing banking functions, speculating or to apply monetary policy. Here is a brief summary.
Banks are by far the biggest participants, with interbank trading reflecting commercial turnover as well as speculative activity. Some forex trading is based on customer needs but a large part of the billions traded by banks is purely speculative, for internal profit – all over incredibly efficient electronic systems that each uses a forex robot that automatically responds to forex signals.
Central banks participate in the forex market to influence money supply, inflation or interest rates and often have access to enough forex reserves to stabilise markets and to influence the long term direction of a currency’s exchange rate.
Commercial companies use forex transactions for practical purposes: to pay for goods or services imported from another country or to transfer capital from one country to another. Even though individual transactions may be small the cumulative effect of trade flow can alter the course of forex rates.
Along the same lines investment management firms trade one currency for another when they purchase or sell securities or other assets across borders. Some investment management firms have more specialised units that trade currencies in an attempt to limit their client’s risk exposure – or to make a profit.
By far the largest proportion of currency trades are made purely to speculate. Hedge funds are major currency speculators, never actually taking possession of a currency. Private individuals are a growing group of speculators that use forex trading platforms to trade forex online – retail forex brokers enable individuals to take market positions with relatively small capital amounts.
Other forex participants include non-bank foreign exchange companies – the retail desks in airports and shopping malls that buy and sell cash – as well as money transfer companies that let individuals transfer small cash amounts between countries.