Market Participants in Foreign Exchange

The main participants in the FX market are:

• market makers 
• brokers 
• central authorities 
• international corporations 
• fund managers 
• leveraged accounts

Market Makers

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Brokers

Brokers do not quote their own exchange rates; they are not market makers. Rather, they act as intermediaries for the market makers, relaying the best prices and trying to match buy and sell orders.

The broker will not reveal the name of the counterparty making the quote until a positive commitment has been made by another counterparty. The broker makes a commission, charged to both counterparties to a transaction.

Brokers do not take positions in the FX market, nor do they take on the risk associated with holding an inventory of currencies subject to fluctuations in exchange rates. They are intermediaries between buyers and sellers, not market makers.

In the past, brokers were particularly useful to smaller market makers who might otherwise have found it difficult to obtain a competitive market rate given the average size of their deals. However, electronic broking and a single currency in the euro area (EUR) have greatly diminished the role of the voice broker in recent years.

Central authorities

Central authorities or central banks enter the FX market for several reasons:

to strengthen or weaken their own currency or to assist another central bank to do the same
to switch reserves from one currency to another
to smooth out any undesirable fluctuations in an exchange rate
When active in the FX market, the central authorities will transact deals with the market makers. In such situations, the central banks are said to be intervening in the market.

Central authorities include such banks as the European Central Bank (ECB), the US Federal Reserve Bank, the Bank of England, the Swiss National Bank, and the Bank of Japan.

International corporations

Fund Managers

Fund managers are institutions or individuals that manage investment portfolios either on their own account or on behalf of their customers. When they invest in the international stock and bond markets, they will have a natural need to convert from one currency to another in moving from one stock/bond market to another.

Leveraged Account

Leveraged accounts are high net worth individuals (private customers), as well as institutions, that are involved in margin trading. This allows them to speculate in amounts that are far larger than their available capital. They would need to post collateral (for example, treasury securities) with the bank in a blocked account. The bank would then propose a leverage multiple that both sides find acceptable.

For example, if the leverage multiple is ten times, then the investor can post collateral of USD 10 million and can subsequently trade up to USD 100 million in the FX market.