CENTRAL BANKS
National central banks play a crucial role in the foreign exchange (FOREX) markets. Their primary goals include controlling the money supply and maintaining official or unofficial target exchange rates. Because many central banks hold substantial foreign exchange reserves, they possess significant power to intervene in the market. One of their most important responsibilities is restoring orderly market conditions during periods of excessive volatility and mitigating the inflationary effects of a weakening currency.
Often, merely the expectation that a central bank will intervene is enough to stabilize its currency. However, when intervention becomes aggressive, the immediate shift in short-term supply and demand can successfully move exchange rates in the desired direction.
If a central bank fails to meet its objectives, market participants may challenge it directly. The combined financial resources of global traders can overwhelm even the strongest central banks, as seen during the 1992–93 European Exchange Rate Mechanism (ERM) crisis and the 1997 currency turmoil across Southeast Asia.
BANKS
The Interbank market handles both the majority of commercial currency transactions and vast amounts of speculative trading. It is common for a large bank to trade billions of dollars in a single day. Some of these transactions are executed on behalf of corporate clients, but bank treasury departments also trade actively for profit.
Competition among banks in the FX market has increased significantly in recent years. The once-exalted status of top foreign exchange traders has diminished, especially as equity traders regain dominance. A large portion of interbank trading now occurs through electronic booking systems, which has reduced the role of traditional foreign exchange brokers.
INTERBANK BROKERS
Until recently, FX brokers handled large transaction volumes by facilitating trades between banks and matching anonymous counterparties for relatively small fees. However, with the rise of internet-based and electronic trading systems—restricted to banks only—much of this business has shifted to more efficient platforms.
Although the traditional broker box, which allows traders to listen to market quotes, can still be found in many dealing rooms, the volume of business handled by brokers has dropped noticeably compared to just a few years ago.
COMMERCIAL COMPANIES
Commercial companies involved in international trade form the backbone of the foreign exchange market. Multinational corporations face exposure through accounts receivable and payable denominated in foreign currencies, and they rely on the FX market to hedge against unfavorable exchange rate movements—one of the main reasons these markets exist.
Typically, the size of commercial transactions is too small to influence short-term market movements, as major currency markets can absorb hundreds of millions of dollars with little immediate impact. Nonetheless, long-term trade flows play a decisive role in shaping currency trends. Some multinational firms with large but less-visible exposures can still move markets when they hedge substantial positions.
RETAIL BROKERS
The growth of the Internet has led to the emergence of numerous retail FX brokers offering trading platforms, market analysis, and strategic advice to individual traders. Many banks do not offer foreign exchange trading services to retail clients due to limited resources or lack of interest, making retail brokers a necessary alternative.
These brokers operate more like stock or mutual fund brokers, providing service-oriented support tailored to individual investors.
HEDGE FUNDS
Hedge funds have become known for aggressive currency speculation. With the large amounts of capital they manage, the scale and liquidity of the FX market is highly attractive. The availability of leverage allows these funds to take positions worth tens of billions of dollars.
Hedge funds often move in herds, as seen in the early 1990s when George Soros and others pressured the British pound out of the European Monetary System.
Despite their reputation, such funds usually succeed only when supported by sound investment strategies. Many argue that hedge funds ultimately provide a valuable service by exposing economic weaknesses and forcing currencies to adjust to more sustainable levels.
INVESTORS AND SPECULATORS
Speculators play an important role in efficient markets by assuming the risks that commercial participants seek to hedge. The distinction between hedging and speculation in the FX market is not always clear, as many participants—including banks and even central banks—engage in speculative activity.
The FX market is particularly attractive to investors due to its high leverage and exceptional liquidity, which allow positions to be opened and closed quickly. Another popular strategy involves exploiting interest rate differentials between currencies, reflected in instruments such as 30-day and 60-day forward rates.