Chapter 2: Forex Participants

Before starting to work on Forex, it is necessary to understand what place a private investor occupies in the system of world currency exchange. Studying the type of participants in Forex and their influence on this market will help to understand how currency rates change in the world. A slightly simplified scheme of interaction of Forex participants is given below.

The central link in the system of international currency exchange is brokerage firms, also called brokerage houses. They play the role of intermediaries between other major participants of Forex.

Commercial banks are the main participants of Forex. They can make currency buying/selling transactions both on their own behalf and at the behest of their clients. Such deals can be concluded either directly with other commercial banks, with which they managed to come to an agreement on quotations, or through brokerage firms. The simplified scheme of interaction is as follows – the dealer department of a commercial bank wishing to purchase the currency of interest contacts a brokerage firm and asks what terms of the deal are offered by other commercial banks. If the terms of the deal are satisfactory, the commercial banks conclude the deal through the brokerage firm, which in turn earns on the commission (interest from the deal). Thus, brokerage firms are the central place (!) where the real exchange rate is formed. Commercial banks receive information about the current level of the exchange rate from brokerage firms.

Another major participant in Forex is the central banks of the world. These participants enter the market, as a rule, not with the purpose of making profit, but with the purpose of adjusting the currency exchange rate and, consequently, the economy of their country. Often central banks do not make deals directly, but through one or more commercial banks, masking their activities. Central banks of developed countries of the world can unite to achieve a common goal.

All the above mentioned Forex participants are active participants, i.e. they not only make transactions on the currency market, but also offer their own prices (quotes). Active participants, as a rule, make transactions for millions of dollars and do not use margin trading (it will be described in detail later). Active participants of Forex are also called market makers (from the English word combination market makers). In addition to active participants, passive participants also work at Forex, i.e. those who do not set quotations, but can only make deals according to the quotations offered by active participants.

 

Passive participants, first of all, include various investment funds. These companies, through currency speculation, place their funds in the securities of governments and corporations of various countries. One of the most famous investment funds is George Soros’ Quantum fund. Investment funds have billions of US dollars at their disposal, moreover, they can raise billions of US dollars of borrowed funds, so investment funds can resist even central banks’ interventions in the currency market.

Another type of passive participants in Forex are foreign trade participants. These are companies that export abroad or import from abroad. If the transaction on import of goods is carried out in foreign currency, such currency must be bought before the transaction. On the other hand, if the transaction of exporting goods is in foreign currency, then such currency needs to be sold after the transaction. Such transactions, as a rule, are carried out exclusively through commercial banks.

The next passive participant is international corporations, which are companies that have branches abroad. When moving funds from branches abroad to the central offices, one cannot do without conversion operations carried out through commercial banks.

Gradually we have come to the role of a private investor in the international currency market Forex. A private investor, as a rule, does not have the capital sufficient to make transactions through brokerage houses – the minimum size of such a transaction on Forex is 100 000 USD. A private investor can buy/sell currency through commercial banks, but it is impossible for private investors to speculate on the rates of commercial banks – they change, as a rule, only once a day, and the difference between the buying and selling rates (spread, about it later) is very high to get any profit from the operation. That is why so-called commission houses (they can also be called retail brokerage houses) appeared on Forex, whose target clients are private investors. Using the principle of margin trading (it will be described in detail later), a private investor can, having a relatively small capital, make transactions hundreds of times larger than this capital through a commission house, but risking only his capital (without risking other people’s funds).

With the development of the Internet, brokerage houses have evolved into dealing centers and can now provide their services to anyone around the world. Anyone who has a sum of several thousand US dollars can try his/her hand at Forex. But do not hurry! Before you open an account and start working in one of the dealing centers of the Internet, thoroughly study the material of the Forex Arena site and work on a virtual account for several months. Almost all dealing centers on the Internet allow you to open a virtual account. You will not lose anything and will gain invaluable initial experience in Forex trading.