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The Forex Market Structure: Who Are The Key Actors?

forex market structure
Who are the main players at the heart of the Forex market? Why do they aim to influence exchange rate valuations? What's their vested interest? In this article, I break down the different groups that make up this incredibly complex web of participants, all interacting with each other under various electronic broking systems. Let's dive into it...

The Global Prime Team was recently asked by a new member of our Discord room if we could recommend how to learn more about institutional influence on the Forex market.

Forex is a market like no other

In this article I am adding my grain of sand by answering the question in general terms. After all, that’s the only practical response in what’s by far the largest asset category in the world.

Forex transacts trillions per day. In fact, the latest BIS Triennial Survey shows that global foreign exchange trading increased to more than $6 trillion per day.

So, generally speaking, at the core of the FX market is a relatively small number of international banks. These banks have credit lines (trading limits) with each other. This allows them to create their own tight-knit cohort to trade with each other in the market place. The market place consists of direct contact between these banks as well as contact via brokerage systems.

Institutions and individuals, who wish to have absolute direct access to the core of the market, must have a Prime Brokerage relationship with one of the big banks, as Global Prime does.

Types of participants in the Forex space

A defining feature in Forex is the broad variety of participants. Below are the main groups:

Central Banks: These entities are the most influential as they can and often intervene to calibrate disproportionate exchange rate valuations or intentionally devalue fiat through monetary policies. These actions are taken to keep the value of the country’s currency within confinements defined by their monetary policies in pursuance of explicit commitments. Note, some small banks and larger corporates may also clear their FX transactions through central banks, and in turn, these would hedge to maintain a balanced ratio of FX reserves.  The BIS (Bank of International Settlements) is a supranational entity that has also been reported to be very influential, often refereed to as the bank of central banks.

Sovereign funds:  This group includes state-sponsored investment funds that invest proceeds from all sorts of activities (business privatisations, natural resources, you name it, in foreign currency assets. Some examples include Norway-Government Pension Fund, China Investment Corporation, ADIA-Abu Dhabi Investment Authority, etc. They tend to make structural trades.

Big commercial banks: These are the UBS, Goldman Sachs, Morgan Stanley, HSBC, Deutsche Bank, Barclays, Citi Bank of the world. They are characterised by having a huge client base alongside large prime brokerage businesses. Since their operations are huge, they also have sales force to incentivise interest and turnover from some of its largest clients (hedge funds, corporates…).  Their activity has transitioned from riskier non-client funded proprietary strategies into strategies designed around custodianship of client flows. This change took effect after the global financial crisis in 2008 due to  new Basel regulations. Within this same category we also have a much smaller-tier banks that heavily rely on corporates to generate turnover.

Corporates: These account types transact huge amounts of money at times, even if the main purpose is to hedge the risk of exchange rate variations due to the nature of their business. On-boarding corporate names can be a lucrative business for banks. Not only through the representative fees charged based on mammoth-size transaction volumes, but also because banks can obtain great insights from certain corporate dealings as these players tend to be the most informed about the industry that they must seek out protection/hedging against. When you think about corporate names in Forex, a clear example would be the BMWs of the world with an interest to run constant hedging strategies. Now multiply that by the thousands and thousands.

Real-money funds: This category tends to be quite passive in nature. The amount transacted can be quite meaningful and move the market. They tend to be unleveraged because their transactions are not motivated by making profits but rather as a means to re-balance the books at the end of financial quarters, end of the fiscal year, etc. In this video I extend on it.

Hedge Funds: They tend to follow a holistic approach by operating all types of asset classes from FX, commodities, equities, now cryptos. The amount of capital under management is quite substantial. This category is what’s referred to as the large speculators in the CFTC commitment of traders report. They are often called ‘the smart money’ as they tend to be on the right side of the trend, since they are the ones that do produce sufficient pressure in the first place. Note, as part of the Hedge Funds, there will be a few specialised in trading just Forex. They are motivated to generate as high a return as possible. These days, hedge funds deploy all types of trading strategies, from fully automated, semi-automated, manual, hybrid, etc.

HNWs: Another category that earns the right to be a respectable breed on its own in Forex trading is what we call HNWs or High Net Worth Individuals. These are individual retail clients, but due to the success they’ve generated and the money under management, they do operate directly through bank trading platforms. These traders can create a turover of billions per month.

Retail brokers: The vast majority of retail brokers do no provide a genuine A-book business models. By not by passing their client orders to the larger clearing centres (prime brokerage), they also make up their own category on its own right as the transactions can be quite big. If as a retail trader, your broker engages in these practices, its labelled as non-STP (no straight through processing). These brokers would take bigger risks by adopting an ad-hoc model by which client flows will be hedged or serve as a vehicle to speculate for bigger profits by not clearing them.

Market makers: Another type of player that must be accounted for include the market makers aka liquidity providers. They deploy match-making algorithms that have, as main function, act as the counterparty to facilitate business. The business model of market makers orbits around quoting both a buy and a sell price for its clients and makes a profit on the bid-offer spread. They stand ready to regularly buy or sell the financial instrument at a publicly quoted price. Most foreign exchange trading firms are market makers and the same applies to many banks.

Retail traders: The vast majority of retail traders are the smallest fishes in the pond. These operators engage via manual trading, automatic/algorithm, or via some time of hybrid version by tapping into technology to generate signals yet still assessing the placement of trades manually. These traders will tend to operate multiple times per session in the lower timeframes.

How do all these players interact with each other?

To wrap it all up, it’s worth noting that all these players that comprise the Forex market are able to interact seamlessly via a number of electronic broking systems (EBS). The main powerhouse for a long time has been EBS (owned by CME) although there are others like Reuters Dealing, Currenex, to name a few, who all do the same thing and give the banks a meeting place to form a market by putting in bids and offers. Those with access can place bids and offers into the system, thereby creating a marketplace.

At the end of the day, there are many complexities to fully understand FX trade executions given the opaque and highly fragmented nature of the market. In the latest 2019 Triennial Survey by the BIS (Bank of International Settlements), they found that trade execution has undergone rapid change as new technologies become available with increasing complexity.

I hope that this article added value to increase your fundamental knowledge of the Forex market structure. I’ve tried to simplify what’s an otherwise incredibly complex web of intertwined actors with very different intentions and purposes to conduct dealings. At the end of the day, there are a million reasons that cause currency price fluctuations. As traders, we must identify instances where the preponderance of evidence tells us one side is exerting more pressure over the other to then aim to profit along the way with a long enough time horizon in mind.

Education – The Global Prime Academy

Check out the Global Prime Academy website. Are you ready to learn a set of strategies around FX indices to take your game to the very next level? The academy provides a structured frame to build a solid knowledge base on how I operate as a trader. Check out the ‘Basket Trading‘ video promo as an example.

The Truth About Forex Brokers (Things You Must Know)

About the author

Ivan Delgado

Ivan Delgado is a decade-long Forex Trader. Feel free to follow Ivan on Youtube. Join thousands of traders who follow Ivan's insights to increase their profitability rate by learning the ins and outs of how to read and trade financial markets. Ivan has you covered with in-depth technical market analysis to help you turn the corner.


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