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Forex Market Structure, Forex Players and Forex History

Forex Market Structure, Forex Players and Forex History

Unlike the stock exchange market where a single entity fixes all the transactions and trading rates, the Forex Market structure is decentralized. It means the market which trade trillions of Dollar daily, actually does not have a central marketplace. Forex trades from the multiple small currency exchange outlets which are present around the world. All trading happens on its virtual platform where anyone from giant super banks to an ordinary trader can trade.

Forex Market Structure

Forex Market StructureBeing a decentralized exchange market place, Forex does not have a fixed committee or agency to set rates; there is no fixed rate which gives the freedom to each Forex dealer to trade as per their preferred quotes. As there are many Forex traders out there, competition between them often heads to give individual traders like us a fair and good deal. FX does not have a fixed hierarchy by rule, but according to the amount traded, there is, of course, a ladder in this market. The topmost place is occupied by the interbank market which includes Super Banks, Centralized Banks, Government agencies which trade through electronic mediums preferably EBS (Electronic Brokering Service) and Reuters Dealing. This ladder then steps down through hedge funds, giant companies and continues to step down with various other private banks, medium and small-sized companies, Forex dealers and last but not the least with traders like me and you. FX market structure is developed with such expertise that everyone who trades over it gets a fair and transparent trading experience.

Forex Market Players

Up to the late 1990s, the Forex (FX) rules were such that you could trade only if the minimum trading value was 10 to 50 million USD. The key Forex players were some giant companies and super banks owing to the high minimum limit to trade.

With the reach of the internet to masses across the globe, online Forex brokers began to offer trading accounts to common people all around the world. Notwithstanding the rise in the number of retail traders, there are still a few giant players who have a dominant presence on this Forex market.  These are –

The Super Banks –

These are the world’s largest banks which have a strong hold on Forex market and control the exchange rates. ‘Interbank market’ or the group of the super banks includes Citi Bank, JP Morgan, Barclays, Deutsche Bank, and HSBC. Foreign Exchange Market is synonymous with the interbank market.

Giant Commercial Companies –

Companies deal in Forex trading for their business purposes. An example of such companies is Apple which exchanges the USD for Japanese Yen before buying electronic goods from Japan. M&As or Merger and Acquisitions, especially international cross border M&As, between large companies impact the currency exchange rate significantly.

Government and Central Banks –

Central Banks like Bank of England and Federal Reserve and national governments regularly trade on Forex affecting the trading rates and the currency values.

Speculators –

Speculators are directly responsible for around 90% of FX trading volume. With the intention of making profits with the fluctuations in exchange rates, the speculators include traders, brokers, hedge funds, commercial banks and financial institutions.

Know Your Forex History!

While traders today are fortunate to have Forex or FX for currency exchange, back in the 18th and 19th century, most of the countries used gold and silver to make international payments. In 1875, the Gold Standard Monetary System which allowed currencies to be backed by gold was established (important in FX history). Though this system was the most sought after, it was abandoned by some countries with the onset of World War II.

Then Bretton Woods System came into existence in 1944 when allied nations from World War II gathered for creating an internationally accepted monetary system. Some features of Woods System were –

  •    Globally accepted method for currency exchange at fixed rates.
  •    US Dollar became the primary currency which was used as the principal marginal currency or reserved currency.
  •    IMF (International Monetary Fund) was established.

Though this system was quite helpful initially, it became outdated gradually as it was running on a fixed rate concept and there were few other currencies which were growing in the world. Ultimately this system got abolished in 1971 and a new system under the captaincy of the USA was formed in which the currency exchange rates kept changing depending upon the supply and demand. This latest system when got threaded with booming technology – internet, paved way to ‘Retail Forex Brokers’ enabling even small traders to indulge in currency business.  Unlike the old interbank trading system which mandated the trade size to be 1 Million units, Forex encouraged the small traders by permitting them to trade low volumes with as low as 1000 units.

1 Comment

  1. Alisha Shakya on August 8, 2019 at 2:08 AM

    Forex has a hierarchy system, whereby major controlling capacity is held by super banks and moving down.

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