Day Trading & Forex Forum

FX WHOLESALE MARKET PARTICIPANTS – WHO ARE THEY, WHAT DO THEY DO AND HOW DO THEY DO IT?

Introduction

The foreign exchange market is the world’s largest capital market, with daily transaction volumes between the various wholesale participants averaging $1.9 trillion This guide will give the reader a basic idea of who these participants are, and how they go about their business.

Who are the key participants?

• Banks. Primarily in the business of the distribution of money (whilst retaining some of it for themselves), banks act in several capacities dependant on situation.
• Investment Managers: Investing client money in the world’s equity and fixed income markets, investment managers are required to effect foreign exchange transactions on a daily basis in order to deal with the flow of their client monies from country to country.
• Hedge Funds / CTA’s: Similar to investment managers, but with greater license to use ‘non vanilla’ instruments such as derivatives.
• Corporate Users: Any large or medium sized company transacting business in more than one country.
• Retail Brokers: Aggregating smaller retail sized trades and offsetting their risk in the wholesale markets.
• Central Banks: Managing the economic needs of their countries by action (direct or indirect) in the foreign exchange and interest rate markets.
• High-value private individuals: If an individual trader’s account and deal size is large enough they can access wholesale liquidity but this is a reasonably select band of people.

Why do they trade foreign exchange?

The reasons for trading FX vary from participant to participant. Some will have varying reasons to trade, and varying styles when they do. But the reasons can be broadly broken down into 7 main categories.

• Speculative trading. Trading in the anticipation of short / medium term gain. Timeframes typically minutes, hours and days.
• Investment. Activity designed to take advantage of longer-term trends. Timeframes of weeks and months.
• Equity / Fixed Income ‘flow’ trades. Investment managers trading to support traditional investment activity.
• Hedging. Trading to limit or completely mitigate currency exposure (risk) acquired as a result of some other aspect of the participant’s business activity.
• Cross border cashflow. Where business activity takes place across borders, fx transactions are often necessary. Typically this will apply to corporate activity.
• Official central bank operations. Action taken either by single central banks or on a concerted basis typically to restrict excessive volatility.
• Liquidity provision / market making. Banks, in addition to trading for themselves, service their customers, providing them with the ability to trade large amounts.