According to the BIS study Triennial Central Bank Survey 2004
53% of the transactions were interbank or interdealer strictly
33% of the transactions dealt with a fund manager or an kind of financial institution not associated with banks and a dealer (like bank for instance).
14% were held between non financial organizations and dealers.
Commercial banks take the majority of currency deals. Accumulating the markets exchange conversion cumulative needs due to clients' operations as well as means accommodation or attraction and their movement to other banks are the main bank activities. Banks can carry out their independent deals for their own purpose aside from customers. Large international banks such as Deutsche Bank, Barclays Bank, Union Bank of Switzerland, Citibank, Chase Manhattan Bank, Standard Chartered Bank affect the exchange markets in the world considerably by the daily operations at the amount of billions dollars. Such dramatic volumes can have an influence on the currency price or the quotation. Such large players usually contain the groups of bulls and bears.
The interbank market deals with the commercial turnover majority as well as speculative trading considerable amounts carried out daily. Billions of dollars is possible turnover for a large bank. Besides the customers' transactions, the majority of the operations are made for the bank's own account and by proprietary desks.
The exchange brokers from abroad led the major part of their business by creating low-paid anonymous counterparts and facilitating interbank transactions some time ago. Recently the majority of this business got down to using such electronic systems as EBS, Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The traders are still listening in on ongoing interbank trading through the brokers squawk box but the trading amount got much smaller lately.
Bulls is the name for the participants of the Forex market who try to make the currency price higher.
Bears are supposed to be concerned with the currency price reduction in the Forex market. The common market process is a balance between bulls and bears market and in case of a currency price change it is mostly not very significant. Though when either bulls or bears take the lead the exchange prices may change dramatically.
Commercial companies are one of the key financial players as far as they are interested in foreign exchange in order to pay for goods produced or services provided. These companies usually deal with small trading amount comparable with the banks or speculators but can have a brief effect on the market rates. Still, the streams of foreign trade are the important factors affecting the permanent currency rates. The exposures of some multinational companies happened due to covering very large positions can have a strong effect of the market in case the players are not aware of these processes.
Investment Management Firms. They usually deal with considerable accounts being the assets of such customers as pension funds and endowments. are quite important players for the exchange market as far as they use it to make the transactions of their foreign securities easier. For instance in order to pay for and redeem foreign equities purchases and sales the manager of an investment company having an international equity portfolio will have to deal with the certain market that will force him to sell or buy foreign currencies. The purpose of such transactions is profit increase and they are not considered as speculative, being secondary for the investment decisions. There are special Currency Overlay units included in the investment management firms that try to make profit of customers' assets with a minimum risk using currency operations. These transactions may have an affection on large trades as far as the number of the dedicated currency managers in not high whether amount of their AUM (assets under management) is considerable.
Companies with foreign investments: These companies use Forex market for their foreign trading operations. The companies being the participants of international Forex market such as regarding importers have a stable foreign currency demand whether the exporters have large amounts of the currency on offer. Both these kinds of the companies have short-term deposits to hold their currency. That's why these companies don't use the Forex market directly due to using commercial banks for conversion and depositary operations.
The companies carrying out foreign investments of assets, such as Investment Funds, International Corporations, Money Market Funds. These kinds of companies contain a number of international investment funds that are following the policy of their investments diversification by placing the assets in various governmental and company securities. Georges Soros's Quantum, and Dean Witter fund are well-known funds of this kind. Xerox, Nestle, General Motors, British Petroleum and others are the kind of companies that deal with the international industrial investments for purposes of joint ventures, creating branches and others.
Hedge Funds: These funds, known due to George Soros's Quantum fund, have raised their importance during the 1990s currency speculation in an aggressive form. Billions of dollars at the disposal of these funds along with the billions that can be borrowed make Hedge Funds the possible better support for the currencies of the countries welcoming Hedge Funds than central banks are.
The reputation of the Hedge Funds has raised due to their recent aggressive currency speculations. As far as the amounts of money in such funds are increasing they are very attractive for foreign exchange markets. These markets can speculate with tens billions of dollars due to their leverage so consolidation of the players known as the herd instinct of these funds can be very unpleasant. Though, these funds are not thought to be successful without the strategy that sounds. It is also thought that the actual functioning of these funds is instable financial weakness using and uncovering for the purpose of returning the normal values to realignment.
Speculation: Currency speculators and the influence they cause to the currencies depreciations are widely and regularly disputed. Thought the speculators are considered to carry out such important functions as supporting hedgers for the market and entrusting the risks with suitable people from the point of view of some economists like Milton Friedman. Others (for instance Joseph Stiglitz) consider this not an economical approach, but mostly a political or dedicated to the free market one.
The key speculators provided by professionals are the well-capitalized position traders as well as the major hedge funds.
Many countries are quite suspicious to such operations as currency speculations. From this point of view, the traditional forms of investment including stocks and bonds bring more effective economic rise by supplying the capital unlike currency speculations. This is considered just as gambling that often doesn't go along with the economic policy. The currency speculations obliged the Central Bank of Sweden make a short-term rise of the interest rates up to the value of 150% a year that has been followed by krona devaluation. One of the most determined advocates of this point of view, Mahathir Mohamad who used to be the Prime Minister of Malaysia, called George Soros and other speculators the main culprits of the Malaysian ringgit devaluation in 1997.
The follower of the opposite opinion, Gregory Millman, argues that speculators make the international agreements to be enforced as well as forecast the consequences of the main economic law for the purpose of making profit being compared to vigilantes.
Simply speaking, the speculators of the forex market just accelerate the economical process bringing the economy to an unavoidable collapse in case the instable financial masses occur or the economy is carried out badly. A soon collapse is supposed to be better way out than a prolonged depression. Thus, it is supposed that in order to distract the public attention from putting the economy into decline Mahathir Mohamad along with the other critics blame the speculators.
Central banks - they provide the currency security from its exchange rates considerable leaps causing economical crises as well as monitors the balance of export-import processes that can be generally called currency regulation. Exchange markets are under direct pressure from central banks. It can affect the market either by direct currency pressure which is the straight line affection or by varying the interest rates and money assets which is called indirect affection. As far as they can be interested in uptrends as well as downtrends due to the certain targets, they can not be called either bulls or bears. In case the aim of the central bank is to affect the national currency it acts alone in the forex market, but if it cooperates with other central banks their goal is likely a joint intervention or common currency policy. The key players in the sphere having the greatest influence are: Bundesbank (the central bank of Germany), Bank of England (the Great Britain), the central bank of the USA and Federal Reserve System (US Federal Reserve or just FED).
Foreign exchange markets are dependent on national central banks as well as the inflation, the interest rates, as well as the money support are under control of the latter. Sometimes there are some certain goals for the national central banks concerning their national currencies target exchange rates. As well as they possess their own substantial foreign exchange reserves, they can use these reserves for the purpose of economy stabilization. The stabilization strategy for the central banks offered by Milton Friedman is trading for profit which means buy as soon as the exchange rate gets too low and to sell in order it is too high. Though while the central banks do not have any risk of the bankruptcy in case of large losses, there is no reason for them to follow this strategy.
It is enough for the central banks to provide some rumor or expectations in order to make the currency stable but to the countries with an unstable currency policy it is possible to apply such methods as an aggressive intervention. Still, it doesn't always let the central banks achieve their goals. Any central bank can be easily defeated by the combination of market resources. The 1992-93 ERM collapse has suffered various kinds of these operations as well as the South East Asia later.
Currency stock exchanges are the reality for the transitive economies. Legal person currency exchange and Forex exchange rate shaping are realized by the currency stock exchanges. Forex exchange rate is usually widely affected by the state due to the market density.
Forex broker firms - they provide the currency conversion or credit-depositary processes between the foreign currency purchaser and seller as well as the meeting of the above mentioned ones. The broker firms have their fee by charging the percent out of the operation sum.
The share of the retail brokers is insignificant in accordance with the general amount of foreign exchange market. A daily retail volume estimated by one broker is from $25 to $50 billion according to CNN-provided data which makes only about 2% of the whole volume. According to the National Futures Association official cited by CNN as well, Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically. The retail forex makers generally work with two different trading desks. The first one called non-dealing desk is used for the actual foreign exchange trading and is generally traded by the proprietary. The second one called dealing desk or trading desk is used for traiding off-exchange with retail customers. As far as a great number of retail speculators of the currency are beginners and are hardly profit-making the offset of the clients' trades on the interbank market is impossible as it's asked by the makers that have to take the same position with the clients. The interbank market would have a stable income from the market makers in case all trades were offset. In case the market maker considers the net positions of its clients to be quite insecure it usually applies offsetting.
The dealing desk has roughly the same functions as currency exchange counter does in the bank. The retail customer sees the interbank exchange rates at a dealing desk (in the bank lobby as well) only after the rates coming from the interbank system are adjusted at a non-dealing desk in order to preserve the market makers' (or the banks') profit. That's why the prices of dealing desks can't be considered as a direct currency exchange index being the value substituted by the originating broker.
The off-market pricing done by retail market makers on the retail trading platforms gives sense to the arbitrage which is still effectively avoided by makers by moving the pickers (which is a widely used name for arbitrages) off from their systems as well as by a sharp reduction of market activity of the latter.
Most Forex brokers, excluding rather small number of them, do not provide a direct access to the interbank trading for their customers due to two obvious reasons. First reason is a limited number of banks which are ready to deal with private investors' orders and the inability for the brokers to offer this service as a result. The second is that as far as the traders' losses transform directly into the market makers' profit while using the dealing desk model, it is very profitable for such firms as Gain Capital, SaxoBank, FXCM, GFT, and FX Solutions to follow it.
Dealing desk brokers can not only be in charge of the trading but the pricing as well and they can adjust it in any way and any moment to raise the income while non-dealing desk brokers earnings come only out of transaction commissions (fees). To prove this some traders try to make a requotation of a counteroffer done by a market maker by satisfying the execution order of the trader that rejects the order based on the defined terms instead of accepting the offer and places another one that is thought to meet the interests of the market maker.
It is worth mentioning that the retail speculators are not actually in beneficial conditions due to the rules of the game. Possible large profits are the bait for the inexperienced and moreover low-capitalized (because of the account minimum of 250-500 USD) speculators. What is more, some traders are compelled to take unreasonably large positions because of low position size varying from 10,000 to 100,000 units on major platforms. Very high leverage at the amount of 1:100 or even 1:200 is considered to be the worst thing about retail Forex firms. The average leverage used by professional traders generally doesn't exceed 1:10 whether retail Forex firm use such a high leverage without any notification. Such account defaulting may lead to a margin call that would be profitable for the market maker in order the trade is not offset.
Dealing desk brokers being market makers besides creating made-up, off-exchange pricing, also correspond liquidity sources, completely independent and competing, for the banks that take part in the trading by acing as interbank system market makers. Brokers are defenseless before possible off-exchange trade taking out that is thought as a ground for interests conflict.
The insurrection that took place more than 35 years ago forced the minor investors leave the big stock brokerage firms due to possible discounts. The companies like Schwab, E-trade, Ameritrade, Datek, and Fidelity dealing with on-line brokerage, are sure that's it's the possible way of retail Forex market development. The reason for the investors to abandon their brokers is that the latter used to trade for their own benefit (leading so-called churning accounts), or the benefit of the corporate customer, nut not the private investor. It is possible as well to make the traders work without non-dealing desks offering the direct access to the market accordingly.
The Wall Street Journal says that Even people running the trading shops warn clients against trying to time the market. 'If 15% of day traders are profitable,' says Drew Niv, chief executive of FXCM, 'I'd be surprised.' in Currency Markets Draw Speculation of July 26, 2005. It was also said that for the United States it is unlawful to offer foreign currency futures and option contracts to retail customers unless the offeror is a regulated financial entity relied on the data of Commodity Futures Trading Commission. The NFA (National Futures Association) members are legitimate retail brokers having the FCMs (or futures commission merchants) registration with CFTC. NFA gives he possible customer a possibility to the FCM status of the broker. The Securities Investor Protection Corporation controlling stock brokers doesn't have any power concerning retail Forex brokers that are hardly regulated at all. An increasing number of Forex frauds was announced by the CFTC.
Interbank brokers: Some time ago, making the interbank trading easier and providing anonymous deals were the job of the foreign exchange brokers who had a modest income out of these operations. The electronic systems which are now used by the majority of this business' participants are seen to be as a sphere adapted for banks only. The traders are still listening in on ongoing interbank trading through the brokers' box but the trading amount got much smaller lately.
Customer brokers. A specialized services related to the foreign exchange are demanded by private and commercial clients. Analysts and strategic offer the clients to use the dealing services proposed by non-banks. The private clients are mostly not supported by the banks that can't offer an adequate dealing for the commercial clients of a medium size as well as don't possess the necessary resources. The nature of the services provided by these brokers, such as Saxo Bank, is generally oriented to the service but is close to the investment brokers.
Physical persons. They make a wide range of transactions concerning foreign tourism, translations of wages, fees, pensions, sales and purchases of cash currency seen as uncommercial operations. The Forex market trading first introduced in 1986 gave a chance for physical persons to deposit the available money resources in order to gain the profit.