The Forex OTC market is formed by multiple participants – all with different needs and interests – that trade directly with each other. These participants can be divided in two groups: the Interbank Market and the Retail Market.

The Interbank Market:

The Interbank Market coordinates all Forex transactions that occur between central banks, commercial banks and financial institutions.

• Central Banks – National central banks (such as the US Fed and the ECB) play an important role in the Forex market. As principal monetary authority, their role consists in achieving price stability and economic growth. To do so, they regulate the entire money supply in the economy by setting interest rates and reserve requirements. They also manage the country’s foreign exchange reserves that they can use in order to influence market conditions and exchange rates.
• Commercial Banks – Commercial banks (such as Deutsche Bank and Barclays) provide liquidity to the Forex market due to the trading volume they handle every day. Some of this trading represents foreign currency conversions on behalf of customers’ needs while some is carried out by the banks’ proprietary trading desk for speculative purpose.
• Financial Institutions – Financial institutions such as money managers, investment funds, pension funds and brokerage companies trade foreign currencies as part of their obligations to seek the best investment opportunities for their clients. For example, a manager of an international equity portfolio will have to engage in currency trading in order to buy and sell foreign stocks.

The Retail Market

The Retail market coordinates transactions made by smaller speculators and investors. These transactions are executed through Forex brokers who act as a mediator between the Retail market and the Interbank market. The participants of the retail market are hedge funds, corporations and individuals.

• Hedge Funds – Hedge funds are private investment funds that speculate in various assets classes using leverage. Macro Hedge Funds pursue trading opportunities in the Forex Market. They design and execute trades after conducting a macroeconomic analysis that reviews the challenges affecting a country and its currency. Due to their large amounts of liquidity and their aggressive strategies, they are a major contributor to the dynamic of Forex Market.
• Corporations – They represent the companies that are engaged in import/export activities with foreign counterparts. Their primary business requires them to purchase and sell foreign currencies in exchange for goods, exposing them to currency risks. Through the Forex market, they convert currencies and hedge themselves against future fluctuations.
• Individuals – Individual traders or investors trade Forex on their own capital in order to profit from speculation on future exchange rates. They mainly operate through Forex platforms that offer tight spreads, immediate execution and highly leveraged margin accounts.

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It often happens where the Stock market hits whats called a Lull. This results in minimal volume and activity. As a result, it becomes more difficult to open and close trading positions. Furthermore, in a market that is declining due to economic issues, as a Stock trader, you are sometimes faced with making extremely difficult choices based on ingenuity and even luck to try to make a profit.

On another note, in the U.S. Stock market, there are strict rules and regulations to follow. Where as with Forex trading, the opportunity to profit lies both within rising and falling markets. Because you are buying and selling at the same time (with each pair, when you buy one currency against the other, you are implying that one will fall, against the other which will rise, or vice versa).

In addition, since the forex market is so liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position, as is the rule in the stock market.

In the Forex market, margins are low and leverage is high. This is likely because of the liquidity of the market. You will never find such low margin rates in the Stock market. Stock traders require at least half of the value of their investment in their margin accounts, where Forex traders can thrive with as little as 1%.

By now you should have a basic understanding of what the Forex market is, and the benefits to trading Forex vs. Stocks. Next we’ll take a closer look at the “players” in the Forex Market.

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