Chapter 2: Participants in Forex

Commercial banks are the major participants in Forex. They can engage in currency buying/selling transactions both on their own behalf and on behalf of their clients. Such transactions can be conducted either directly with other commercial banks, with whom they have reached agreements regarding exchange rates, or through brokerage firms. The simplified interaction scheme is as follows: the dealing department of a commercial bank that wishes to acquire a specific currency contacts a brokerage firm and requests information about the terms offered by other commercial banks. If the terms are satisfactory, the commercial banks enter into a transaction through the brokerage firm, which earns a commission (a percentage of the transaction) in return. Therefore, brokerage firms serve as a central hub where the actual currency exchange rates are formed. Commercial banks receive information about the current exchange rate levels from brokerage firms.

Another major participant in Forex is the central banks of countries worldwide. These participants typically enter the market not with the aim of making a profit but to adjust the currency exchange rate and, consequently, their country's economy. Central banks often conduct transactions not directly but through one or several commercial banks, disguising their activity. Central banks of developed countries can collaborate to achieve common goals.

All the mentioned participants in Forex are active participants, meaning they not only execute operations in the currency market but also provide their own prices (quotes). Active participants usually engage in transactions involving millions of US dollars and do not utilize margin trading (which will be explained in detail later). Active participants in Forex are also known as market makers. In addition to active participants, there are passive participants who do not set quotes but can only trade based on the quotes offered by active participants.

Among the passive participants, various investment funds are prominent. These companies engage in currency speculation and allocate their funds in government securities and corporate assets of different countries. One of the most well-known investment funds is George Soros's "Quantum Fund." Investment funds have billions of US dollars at their disposal and can even attract billions of US dollars in borrowed funds. As a result, investment funds can withstand interventions by central banks in the currency market.

Another type of passive participant in Forex is private individuals involved in foreign trade operations. These are companies engaged in exporting or importing goods from abroad. If a transaction involves importing goods in a foreign currency, it is necessary to purchase that currency before completing the transaction. Conversely, if a transaction involves exporting goods in a foreign currency, it is necessary to sell that currency after the transaction is completed. Such operations are typically carried out exclusively through commercial banks.

The next passive participant worth noting is international corporations. These are companies that have branches overseas. When transferring funds from overseas branches to central offices, conversion operations through commercial banks are inevitable.

Gradually, we have arrived at the role of the individual investor in the international currency market, Forex. Individual investors typically do not possess capital sufficient to conduct transactions through brokerage firms, as the minimum size of such a transaction in Forex is $100,000. However, through commercial banks, individual investors can engage in currency buying/selling transactions. Speculating on the exchange rates of commercial banks is not feasible for individual investors since these rates generally change only once a day, and the difference between the buying and selling rates (spread, which will be explained later) is typically high, making it difficult to generate profits from such operations. This is why so-called commission houses (also known as retail brokerage firms) emerged in Forex, targeting individual investors as their clients. By utilizing the principle of margin trading (which will be explained later in detail), individual investors can trade through a commission house with positions that are hundreds of times larger than their capital, while risking only their own capital and not the funds of others.

With the development of the Internet, brokerage firms have evolved into dealing centers and can now offer their services to anyone around the world. Anyone with a few thousand US dollars can try their hand at Forex trading. However, before rushing into it, take your time! Before opening an account and starting to trade with one of the online dealing centers, thoroughly study the material provided by Forex Arena and practice on a virtual account for a few months. Virtually all online dealing centers offer the option to open a virtual account. You won't lose anything, and you will gain valuable initial experience in Forex trading.

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