Someone who wants to start forex trading should first know the anatomy of the forex market to understand prices, supply, and demands in the forex market.
Before starting a certain business, someone should first get to know the market in which he will participate in. By understanding the market, he will know how prices, supply, and demands happen and changes all the time. The same is true in forex trading. Someone who want to start forex trading should first get to know the anatomy of the forex market.
One thing that is often said about forex trading is that it is done over-the-counter. Unlike stocks and bonds which have to be traded through an exchange, forex trading could happen without a central exchange. So, where do transactions occur? it is in a huge network in which various entities buy and sell currencies continually between each other.
When we talk about the forex market, it does not refer to a certain building somewhere in which brokers buy and sell according to our instructions. Rather than the usual market, the forex market resembles a worldwide web consisting of central banks, big banks, institutional investors, retail traders, etc. None of those players have the power to determine an exact value for an asset, as the exchange rate is determined through the power of supply and demand in the market, but there are differences of bargaining power between them.
1. Central Banks
In the first place is the Central Banks. Each country has their own central bank that function as banker's bank as well as monetary authority. In that sense, central banks usually has the authority to print money, retract money, and do other measures or interventions in order to stabilize the country's monetary and economy condition. This makes central banks to be one of the key players in the forex market. Because of this reason too, central bank policies commonly affect the value of their currency's exchange rate.
Leading central banks that control major currencies particularly hold huge influence in the forex market, including US Federal Reserve, UK Bank of England, European Central Bank, Swiss National Bank, Bank of Japan, Reserve Bank of Australia, Reserve Bank of New Zealand, and Bank of Canada. However, other central banks are also main players in the forex market and may intervene in the currencies they relate to.
2. Forex Dealers
Forex dealers are global banks that collectively make up the interbank market. They trade forex in a ridiculously huge amount of money each day among each other through Electronic Brokering Services (EBS) or Reuters Dealing 3000-Spot Matching, and also became the hub through which their clients can gain access to the forex market. Major banks which also doubled as forex dealers including: Deutsche Bank, UBS, Citigroup, Barclays Capital, RBS, Goldman Sachs, HSBC, Bank of America, JP Morgan, Credit Suisse and Morgan Stanley. These forex dealers are the ones that often called as market makers of the forex market as they have the power to determine prices and control liquidity in the market for the rest of the market.
The next group of players are ordinary commercial banks that includes your usual brand of banks, excluding the aforementioned forex dealers. These banks can access interbank market where pricings can be accessed through Electronic Brokering Services (EBS) or Reuters Dealing 3000-Spot Matching. They buy and sell currencies for themselves and their clients, also connect the next group of players to price quotes and liquidity.
4. Other Financial Institutions
Financial institutions like hedge funds, big companies, and brokerages are the ones who make up major orders to the commercial banks. They don't have direct connection to the interbank market, but they may have big funds to back them up. The big funds mean that they have considerable pull in the forex market, but are infinitely smaller in scale compared to the market maker banks or governments.
Forex brokerages that facilitate retail forex traders can be a part of this group as well, or the previous one, depending on the way they do their business. Therefore, it also need to be noted that prices on the trading platforms provided by forex brokers are not generated by itself, but derived from the interbank market through platforms developed and maintained by the forex dealers.
5. Retail Forex Traders
The advance of technology means that ordinary people can now trade forex online. Nowadays, there might be millions of traders out there, a huge number that definitely beat the previous groups. Even so, separately and cumulatively they have very small power in the forex market. They can take advantage of price changes in the market, but they can not push to change prices according to their will. Hence, they are often called as speculators or simply market user.
See where forex traders are in the forex market? That is how small we are compared to the bigger players. The other players have no power to determine price with exact precision, but they have became superior as they place higher in the ladder and have bigger power in buying and selling. For them, the cost of transactions are smaller, the time lags between order and execution are near zero, and the amount of funds they control are huge. Because of this, we may not be so arrogant as to think that retail traders can control the market. This is also the reason why understanding market sentiments are considered very important in some quarters, and explain how mere economic estimates can hold considerable influence in the market.