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Forex Market: Who Trades Currencies & Why

The foreign exchange or forex market is the largest financial market in the world – larger even than the stock market, with a daily volume of $6.6 trillion.

The forex market not only has many players but many types of players. Here we go through some of the major types of institutions and traders in forex markets:

Commercial & Investment Banks
The greatest volume of currency is traded in the interbank market. This is where banks of all sizes trade currency with each other and through electronic networks. Big banks account for a large percentage of total currency volume trades.

Central Banks
Central banks, which represent their nation's government, are extremely important players in the forex market. Open market operations and interest rate policies of central banks influence currency rates to a very large extent.

A central bank is responsible for fixing the price of its native currency on forex. This is the exchange rate regime by which its currency will trade in the open market. Exchange rate regimes are divided into floating, fixed and pegged types.

Investment Managers and Hedge Funds
Portfolio managers, pooled funds and hedge funds make up the second-biggest collection of players in the forex market next to banks and central banks. Investment managers trade currencies for large accounts such as pension funds and foundations.

Multinational Corporations
Firms engaged in importing and exporting conduct forex transactions to pay for goods and services.

Individual Investors
The volume of forex trades made by retail investors is extremely low compared to financial institutions and companies. However, it is growing rapidly in popularity.

There is a reason why forex is the largest market in the world: It empowers everyone from central banks to retail investors to potentially see profits from currency fluctuations related to the global economy.

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