Who controls forex?

The foreign exchange market or forex, operates without a centralised authority, meaning no single organisation or trader has full control over it. However, major commercial banks serve as market makers, while central banks hold considerable influence and can impact market dynamics.

Foreign exchange transactions occur around the clock. They take place in various forms and through multiple channels worldwide. They happen anywhere currencies are traded or exchanged.

Having said that, the forex market is huge, making it nearly impossible for any single entity to dominate or control it. Take for example a hedge fund placing a $1 billion buy order on the EUR/USD pair at market price – such a move might cause a temporary spike due to the size of the trade. But since EUR/USD is one of the most liquid and heavily traded pairs, the impact wouldn’t last long.

Also, huge market players tend to shy away from trades that are responsible for big price movements. Apart from leading to less favourable execution, doing so signals their intentions to buy and sell. To avoid causing unwanted attention or a big market impact, traders should act carefully. It is usually wiser to set up their forex positions bit by bit.

There are many different participants in the forex market.
Each has their own goals and strategies. To better understand how the market operates, we can broadly group them into a few key categories.

About the foreign exchange market

One of the most active and fast-moving financial markets is the forex market. Previously reserved for large institutions, central banks and high-net-worth investors, online trading has become accessible to individual traders thanks to the development of online trading platforms.

In the forex market, traders make speculations to guide their buying and selling as they interpret global economic information to bet on price action. High leverage in forex trading allows traders to trade large positions with relatively small capital, but this also presents risks.

The market operates 24 hours a day across various participants, including retail CFD brokers, banks, central banks and commercial businesses. Round-the-clock trading presents difficulties even though it guarantees liquidity and flexibility. Traders cannot monitor their positions constantly, making it essential to understand periods of high volatility and manage risk according to their trading strategy.

Who takes part in forex trading?

Commercial Banks

These are important participants in the foreign exchange market. They are intermediaries who give their customers access to the market along with trading for themselves. Doing so helps support liquidity and are the backbone of the forex market.

Commercial banks frequently employ “proprietary trading desks” for speculative trading along with processing customer transactions. The objective of such desks is to make money for the bank. Proprietary trading still exists, especially in weaker regulatory environments, even though it has fallen since the financial crisis of 2008 as a result of more strict regulation and greater risk management.

Thanks to their extensive resources, infrastructure, and deep market insights, commercial banks rank among the most knowledgeable participants in the forex market. Their access to substantial trading flows, including those from central banks, hedge funds and asset managers, provides them with valuable market intelligence and a considerable competitive edge. 

Ngân hàng Trung ương

Central banks act on behalf of their governments and are some of the most influential participants in the forex market. Through their open market operations and decisions on interest rates, they have a major impact on currency values.

A central bank’s primary role is to manage the value of its national currency in the forex market. This is determined by the type of exchange rate regime in place, be it floating, fixed, or pegged.

Central banks intervene in the forex market to promote economic stability and growth. Just like private traders, they may act to either strengthen or weaken the currency. In times of deflation, for example, a central bank may intentionally devalue its currency by increasing its supply and purchasing foreign currencies. This makes the domestic currency less expensive, boosting the competitiveness of local exports in global markets.

Brokers

Brokers act as middlemen in the forex market, carrying out buy and sell orders for clients, whether they are institutions or individual traders. Also they are generally classified based on the type of clients they serve.

Prime brokers focus on institutional clients and high-net-worth individuals, offering services such as liquidity provision, leverage and technical support. Retail brokers, on the other hand, cater to individual traders by granting access to the forex markets.

Unlike prime brokers, retail brokers often operate as dealers or market makers rather than directly matching buyers with sellers. This means they may take the opposite side of a client’s trade or offset positions internally instead of sourcing external liquidity.

Hedge funds

Hedge funds are collective investment vehicles where multiple investors pool their capital into a single portfolio, managed by a professional fund manager aiming to maximise returns.

These funds employ a wide range of strategies, with some taking an active role in the forex market. While currency-focused hedge funds specifically target foreign exchange movements, others that invest in international assets manage currency exposure as part of their broader investment approach.

Trades made by hedge funds, whether for speculation of hedging, can have a big impact on currency prices because they usually control big amounts of capital.

Retail traders

Retail traders are people who trade currencies to hedge their current positions or to speculate on future price movements. They seek to minimise possible losses from other investments or profit from temporary fluctuations.

Even though they usually hold smaller amounts than governments or institutions, retail traders’ combined activity can have a big influence on the forex market, especially during important occasions like central bank announcements.

Retail traders typically hold positions for short periods of time with the aim to capitalise on small price movements before closing their trades. Most retail participants access the forex market via brokers, who offer leveraged trading, allowing traders to open larger positions with a relatively small initial investment.

For instance, since one standard lot in forex equals 100,000 units of currency, buying a full lot of EUR/USD at 1.3000 would normally cost $130,000. However, with 1:1000 leverage, you would only need 0.1% of that amount, just $130 to open the trade.  

Impact of forex trading on businesses

Businesses all over the world are impacted by the highly liquid, global market that is created by the interaction of various trader types. Exchange rate fluctuations have an impact on a nation’s balance of payments, corporate profits and inflation.

A popular example is the currency carry trade, where traders like banks, hedge funds and individuals, borrow money in low-interest currencies and invest it in currencies with higher returns. This forex strategy affects global economies and currency values.

Carry trades often unwind when interest rates fall in high-yielding countries, causing traders to move their money back into low-yielding currencies like the yen. These shifts can lead to major swings in global stock markets.

Final thoughts about forex

The foreign exchange market is decentralised. This means that no one organisation has total authority over it. Commercial banks, on the other hand, have a lot of power because they act as market makers for both individuals and companies. By influencing currency rates through their policies, central banks also play a significant role.

Forex is the world’s largest financial market, offering profit opportunities to a diverse range of participants, from central banks to retail investors, by capitalising on currency movements influenced by global economic forces. Traders and investors apply a variety of strategies, such as carry trades, to speculate or hedge their positions.

Different parties are involved in the forex market for various purposes. Banks, institutions, hedge funds, and individuals try to generate revenue. Corporations trade to enable global operations and manage risk, and central banks manage currencies through monetary policies and intervention. It is useful for forex traders to know who trades and why.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.