In finance and economics, people often talk about “players”—individuals or entities who take part in the trades and make the whole system run. Whether you’ve just made your first trade or have been battling it out at trading floors for years, you’re a market player. But this has only been the case for the last few years; before online forex trading became possible, only big players (read: millionaires) could be part of it. Of course, as a market player, it’s important to know who’s in the game with you, big and small.
The biggest of the market players are the major banks—the largest and therefore most influential in the world. They trade large amounts of currency every day, valued at billions and trillions of dollars. Because of this, for the most part, they dictate the bid/ask spread, or the difference between buying and selling prices. This is one of the key elements in forex trade. Some of these banks are Citigroup, Barclays Capital, UBS, and Deutsche Bank. In the forex market structure, they are known as the interbank network.
Right behind the interbank are the companies, those that aren’t necessarily in the finance industry but take part in forex in order to do business. Typically, these are companies that need to trade in different currencies. For example, if Marc Jacobs wants to make bags using Italian leather, he must first trade his US dollars for euros and then trade these with Italian factories. Their trades are much smaller than the interbank, of course, so they usually transact with commercial banks for a slightly higher rate.
One way that companies influence the forex market is by causing fluctuations in mergers and acquisitions. When a company in one country is bought or annexed by a company in another, the ensuing currency conversions can push the currencies involved up or down, especially if they are large companies like Apple or GM.
Governments and government banks also participate in the forex market in order to go about their business. They carry out international trade payments and manage reserves of foreign currency. Central banks, such as the European Central Bank and the Federal Reserve, often adjust interest rates to avoid inflation, and this can influence currency values. They can also buy or sell currencies in bulk to tweak the exchange rates when they think their own currency isn’t correctly valued.
The least influential but most numerous players in the forex market are the speculators. Individual traders are part of this slice. They are the least influential individually because they do not control the numbers as banks and governments do, but they account for about 90% of the currency trade, which makes them just as important. Besides sheer size, the main thing that sets you apart from the biggest players is your motive. Whether they have bottomless pockets or a small wad of euros, your goal as a speculator is simply to make more by making smart decisions.