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Forex Market Participants

Only banks were able to execute transactions between themselves in the forex market of old. In the last few years, other financial institutions, like forex brokers and market makers, have arrived at the scene, as well as regular corporations, investment companies, hedge funds and pension funds. Recently, as retail investors (individual investors) have started to participate actively in the forex market, online FX trading has gained in popularity.

The forex market is an OTC (over-the-counter) market, which means that currencies are not traded on a central exchange and there is no clearing house where orders are matched (similar to NASDAQ in the U.S. for stocks). Instead, foreign exchange transactions take place in trading centers that exist around the globe. These centers, in order of importance, are: London, New York, Tokyo, Singapore, Frankfurt, Geneva and Zurich, Paris, and Hong Kong. Only on the basis of trust and reputation to deliver on the currency agreement do banks enter into a forex deal. In the retail FX market, traders enter into a legal contract with their forex broker in order to deposit funds to trade.

Participants in the forex market might be involved in the purchase or sale of international merchandise, in the investment of foreign plant and equipment, in the international money market, or in speculation (trading individual currencies). Their trading time frame might be from a few minutes to a number of years, depending on the type of activity involved. The price of a currency, or exchange rate, is affected on a continuous basis by the total activity of all of these participants. This is because their buying and selling represents the supply and demand for the currency that the transaction is based on. Since the daily trading volume in the major currencies is so large, it is more difficult for any particular market participant to affect the price of an individual currency in any significant way. This makes the currency market a very pure market.

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