Banks

The interbank market caters for both the majority of commercial turnover as well as enormous amounts of speculative trading every day. It is not uncommon for a large bank to trade billions of dollars on a daily basis. Some of this trading activity is undertaken on behalf of customers, but a large amount of trading is also conducted by proprietary desks, where dealers trade to make the bank profits.

The interbank market has become increasingly competitive in the last couple of years and the god-like status of top foreign exchange traders has suffered as the equity guys are back in charge again. A large part of the interbank trading takes place on electronic broking systems that have negatively affected the traditional foreign exchange brokers.

Interbank Brokers

Until recently, foreign exchange brokers were doing large amounts of business, facilitating interbank trading and matching anonymous counterparts for comparatively small fees. Today, however, a lot of this business is moving onto more efficient electronic systems which function as a closed circuit for banks only.

Still, the broker box providing the opportunity to listen in on the ongoing interbank trading is seen in most trading rooms, but turnover is noticeably smaller than just a year or two ago.

Customer Brokers

For many commercial and private clients, there is a need to receive specialised foreign exchange services. There is a fair number of non-banks offering dealing services, analysis and strategic advice to such clients. Many banks do not undertake trading for private clients at all, and do not have the necessary resources or inclination to support medium sized commercial clients adequately.

The services of such brokers are more similar in nature to other investment brokers and typically provide a service-oriented approach to their clients. TradeFreedom belongs to this group of companies.

Central Banks

The national central banks play an important role in the foreign exchange markets. Ultimately, the central banks seek to control money supply and often have official or unofficial target rates for their currencies. As many central banks have very substantial foreign exchange reserves, the intervention power is significant. Among the most important responsibilities of a central bank is the restoration of an orderly market in times of excessive exchange rate volatility and the control of the inflationary impact of a weakening currency.

Frequently, the mere expectation of central bank intervention is sufficient to stabilise a currency, but in the event of aggressive intervention the actual impact on the short term supply/demand balance can lead to the desired moves in exchange rates. Central banks do not always achieve their objectives, however. If the market participants really want to take on a central bank, the combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in South East Asia.

Hedge Funds

Hedge funds have gained a reputation for aggressive currency speculation in recent years. There is no doubt that with the increasing amount of money some of these investment vehicles have under management, the size and liquidity of foreign exchange markets is very appealing. The leverage available in these markets allow such funds to speculate with tens of billions of dollars at a time, and the herd instinct typical in hedge fund circles means that having Soros and friends on your back is less than pleasant for a weak currency and economy. It is unlikely, however, that such investments would be successful if the underlying investment strategy was not sound and therefore it is argued that hedge funds actually perform a beneficial service by exploiting and exposing unsustainable financial weaknesses, forcing realignment to more realistic levels.

Commercial Companies

The international trade exposure of commercial companies is the backbone of foreign exchange markets. Protection against unfavourable moves is an important reason why these markets are in existence, although it sometimes appears to be a chicken and egg situation?

Commercial companies often trade in sizes that are insignificant to short-term market moves, however, as the main currency markets can quite easily absorb hundreds of millions of dollars without any big impact. But it also clear that one of the decisive factors determining the long-term direction of a currency's exchange rate is the overall trade flow.

Some multinational companies can have an unpredictable impact when very large positions are covered however due to exposures that are not commonly known to the majority of market participants.

Investors and Speculators

As in all other efficient markets, the speculator performs an important role taking over the risks that commercial participants do not wish to be exposed to. The boundaries of speculation are unclear, however, as many of the above-mentioned participants also have speculative interests, even some of the central banks.

The foreign exchange markets are popular with investors due to the large amount of leverage that can be obtained and the ease with which positions can be entered and exited 24 hours a day. Trading in a currency might be the "purest" way of taking a view on an overall local market expectation, much simpler than investing in illiquid emerging stock markets. Taking advantage of interest rate differentials is another popular strategy that can be efficiently undertaken in a market with high leverage.