1. The Role of Central Banks
Starting with the central banks, their main objective is to ensure that the country's economy is stabilized, by monitoring variables such as inflation. This is achieved when they regulate interest rates, intervene in the currency market (buying or selling) and also regulate the reserve requirement ratio.
A couple of such banks include, European Central Bank (ECB), Bank for International Settlements (BIS), International Monetary Fund (IMF), European Investment Bank (EIB) the Bank of England (BoE), and the US Federal Reserve.
2. Commercial and Investment Banks in the Forex Market
Being the biggest players in the global Foreign exchange markets, they act on their own behalf or based on the needs and interests of their clients. The narrow spreads within the interbank market allow transactions of huge amounts of currencies at very low costs.
The top-tier interbank market, as it is better known, accounts for about 55% of all Forex transactions done worldwide. A couple of these banks include, JPMorgan, UBS, Citi, Barclays, HSBC and Deutsche Bank. Basically, the interbank market is THE Forex market.
3. How Multinational Companies impact the Forex Market?
These large corporates participate in the Forex market primarily for hedging, and commercial or investment purposes. An example of investment purpose is when a Thai company takes over an US company for $100 million; in this case the Thai company would need to exchange currencies.
What is hedging? It is a risk management technique, if you believe that one investment is risky, then you make another investment to reduce the risks.
4. Institutional Traders in the Forex Market
This category make up about 30% of all Forex transactions done worldwide, and also include insurance companies, pension funds, mutual funds and hedge funds.
This group is also called speculators, since their purpose is to trade for profit and also to hedge their global portfolios against currency risks.
5. Main Purpose of Retail Forex Brokers
They allow retail traders to access the Forex market by transmitting their orders to commercial banks or institutional platforms. These brokers make money from the spread or by charging a fee on each transaction. They act as middlemen between financial institutions and individuals, in exchange for a fee.
6. Retail Traders in the Forex Market
These are individuals like you, who actively trade currencies while trying to profit from the fluctuation of one currency against another. These are also called small speculators, since retail traders are simply in the Forex market to make a profit and not hold the currency for a long term. The category of retail traders is one of the fastest growing segments of the entire Forex market.