Forex Market Structure

Government and Central Banks: When the currency of the country becomes a problem for the domestic economy, the central banks intervene in the market. The floating, pegged and fixed regimes are all affected by this. During the past few years, the Swiss National Bank (SNB) has tried to weaken the Swiss Franc against the Euro. The Hong Kong Dollar is an example of a pegged exchange rate regime. When it gets too close to the lower range of the band, the Hong Kong Monetary Authority will sell it, and when it gets too close to the upper range of the band, it will buy it. When they have to manage their foreign currency reserves, central banks are active in the market. If the Hong Kong Monetary Authority (HKMA) buys US Dollars to weaken the Hong Kong Dollar, it may want to exchange them for another currency, like the Euro or the Australian Dollar. The Asian central banks are often doing this because they have to intervene more in Europe than they do in Asia.

Commercial Banks : One of the most important players in the foreign exchange market is the commercial banks. They also provide a channel for their clients to participate in the market. They are the main players in the market. Commercial banks help their customers facilitate their trades, but also participate in the market as speculators. The purpose of the prop(Proprietary) traders is to make a profit for the bank, and those desks are known as “proprietary trading desks”. Following the financial crisis of 2008, banks have become more risk averse. In countries with less regulatory restrictions, it can be found within the banks. The infrastructure, amount of capital available and knowledge of the market make commercial banks amongst the best informed market players. Flow from central banks to hedge funds and investment funds can be seen by commercial banks. The information they have gives them an advantage.

Forex Dealers / Brokers Dealers & InterDealer Platforms (IDPS): Electornic Brokerage Services “EBS Market” and Reuters “Refinitiv Matching” :
The first electronic broker providing brokerage services for the interdealer foreign exchange market was Reuters. The customer market and interdealer market were the only two tier markets in the spot market. The dealers trade with each other in interdealer FX Market. The interdealer market consists of large multinational commercial banks and other financial institutions whose dealers trade either directly among themselves or with the help of brokers. The dealers worked on the bank’s dealing desk. A foreign exchange dealer buys and sells a particular currency or a small group of currencies. They would have an inventory of the currency. The dealers are here to help their customers. A large bank has a lot of customers. This is why interdealer platforms are called IDPs. They were the first electronic brokering systems to allow dealers to enter limit orders (Central Limit order Book CLOB) and trade anonymously. The trading was carried out through a network of computers. It is important to note that electronic trading was only dealer to dealer. Dealer to consumer trading wasn’t available until years later. At the end of the 1990s, Refinitiv dominated interdealer trading in the major currencies. As they gained popularity, their quotes became the reference prices for the entire market. Only one of the two systems was being used for trading certain currencies. The Euro, Japanese Yen, and Swiss Franc (CHF) were the most popular currencies and ECB platform was used to trade and for The British pound, Australian dollar, Canadian dollar, and the Swedish krona(Scandinavian Currencies) Refinitiv were used for the most. Retail foreign exchange brokers were part of customer market. Most weren’t big enough to trade and don’t have credit relationships needed. The customer of a retail broker is able to trade in the Dealer to customer Market. The interdealer market acted as wholesale market for foreign exchange. It is where prices are formed and spread across the entire market.

Sovereign Wealth Fund (SWF) : State owned investment funds manage the country’s money and invest it in various markets. They are usually found in countries with large amounts of foreign currency, such as Kuwait or Qatar. Transactions of sovereign wealth funds can have a big impact on the currency market.
Prime Brokers: Firms that offer support services to other market participants. Most major banks have prime brokerage operations, but there are also non bank prime brokers active in the business The clients of prime brokers are usually other institutional participants, but in some cases, an individual trader can also use a PB, if he meets the requirement set by the broker.
Retail Brokers: Individual foreign exchange traders can access the market. They can be a market maker or broker. Market makers take the opposite side of the client’s trades and act as dealers. While an ECN Broker (electronic communication network) or STP Broker (A Straight Through Processing broker) allows you to trade with various other participants, the broker has no conflict of interest because they direct most or all orders directly to the market.

Proprietary Firms : Firms that hire individual traders to trade the company’s money and give them in return a certain share of the profits they have realized. A network of fellow professional traders, capital allocation that can easily reach seven figure amounts for successful traders, and professional tools that would be too expensive to purchase as an individual are just some of the benefits of being a successful trader.
Hedge funds Companies: The most prominent members of the group of speculators are hedge funds. The global macro funds and the currency funds are the most active hedge funds in the foreign exchange market. Currency funds are focused on opportunities in the foreign exchange market while macro funds trade in many markets around the world. Huge positions in the market can be handled by hedge funds.
George Soros broke the Bank of England in 1992 and many traders are familiar with the story. The hedge fund industry has changed a lot since then, but they still have an impact on the markets. CTAs and system funds are in this category.

Commercial companies: Multinational firms are included in the group. Their main goal is not to make a profit from currency trading, but rather to hedge their currency exposure or get the foreign currency they need to pay their workers in other countries and similar.
Money transfer companies: Money transferring companies have gained market share in the past 10 years. Digitalisation and consumers becoming more informed was the main reason for this. They are able to beat the exchange rates offered by traditional banks because of the large impact that foreign workers have on the economy of certain developing countries. Money transfer companies don’t engage in speculative trading.