The difference of the Forex and stock market is in the levels of access that is the integral part of the Forex market. The highest level is designed for the inter-bank market (the participants are large banks). The bid/ask spreads of this level are commonly not available to those traders outside this level. There is a certain trend, the lower the level of access the bigger the bid/ask spread (it can vary from 0-1 to 1-2 pips for most traded currencies). The main factor determining the amount of the spread is the volume. In case trader is able to provide many transactions for large sums then the spread of bid and ask price will be as low as possible. Such spread is considered to be a better one. As for the levels of access themselves the determining factor here is so called size of the “line”, i.e. the amount of money you deal with. The share of the inter-bank market is about 53% of all deals. After the inter-bank market there go other not so big large investment banks, international corporations hedging risks and paying employees, other hedging funds and several large retail forex traders. According to experts such bodies as pension and mutual funds, insurance companies are the important part of the Forex market and all financial markets. Moreover another important participants of the Forex market are the hedge funds and Central banks of different countries.
The most part of the every day speculative trading and commercial turnover relates to the inter-bank market as big and well-known banks can trade large sums of money every day. Sometimes the customers make these deals but usually so-called proprietary desks acting on behalf of the banks make them.
Forex brokers were the main driving force of the market in the past that assisted inter-bank trading and searched for appropriate counterpart to this or that buyer or seller. Nowadays the great part of this business is done by the electronic systems. Now traders simply listen what is happening at the inter-bank trading but the turnover today is significantly lower then in a recent years.
A certain part of the inter-bank market relates to the work oh those companies that need foreign currency to make a certain payment. Such companies are not the constant players of the market and do not trade really large amounts of currency like banks do. However the currency’s exchange rate in a long prospective is affected by the trade flows. Sometimes commercial companies cover large positions that are not known by the rest of market participants and thus having significant impact onto the market.
Another important players at the Forex are the Central banks of the different countries. Their purpose of taking part at the trades is to take control over such factors as supply of the money, inflation level and interest rates. Central banks sometimes use their reserves of the foreign currency to make the market more stable. According to Milton Friedman there is the most appropriate way of stabilizing the market for the Central banks by buying at low exchange rates and sell at high exchange rates. On the other hand we cannot be sure that this way will be a really effective one, as the Central banks cannot become a bankrupt in case they incur a great losses and it is not clear whether they are profitable or not.
Only the talks about possible Central bank’s intervention may lead to currency stabilization, however the real banking intervention is also often used commonly in those countries with the so called dirty float regime of the currency. The aims Central banks have are not reached all the time, as the rest of the market assets are much bigger. And several similar situations have already occurred – 1992-1993 European Exchange Rate Mechanism crisis and later several crunches in the Southeast Asia.
Another participants of the Forex market are the investment management firms, like pension funds. Their aim in playing at the Forex is to ease deals in foreign securities. Let consider the example, investment management firms with an international equity portfolio participate in foreign currencies’ trades with an aim to pay for the foreign equities buying. The deals conducted at the Forex are not considered to be speculative or profitable ones.
However sometimes such firms have speculative specialist currency overlay operations that trade the currency to get profit and limit the risks. At the same time there are not too much such firms, therefore those existing manage quite big amount of money and can get great profits.
After the 1996 the hedge funds are considered to be quite aggressive at currency speculation. These funds deal with billions of dollars and so they are capable to have an appropriate reaction on any intervention of the Central bank with an aim to support the currency.
Forex market is also a place of work for such traders as retail forex brokers. Usually there are 2 types of them: those brokers offering speculative trading and those providing physical delivery of the assets.
Forex brokers are also called market makers who are dealing with quite small part of the whole forex (about $25-50 billion a day). There are also retail traders who can only deal via retail brokers or banks.