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Forex Market Makers

 

When referring to Forex market makers we should name commercial banks, importers, private investors, investment institutions, insurance and retirement fund etc. It is also common for commercial bank to perform currency exchange operation at their expenses. Most of the mega banks form their overall profit from the speculative currency exchange operations, which on its turn can sometimes exceed several billion dollars


Currency exchange operations at the prices defined by the active players, are not the only process then Commercial banks and Brokerage companies are engaged in, they can come out to indicate their own prices  as well and  therefore manipulate the price formation process greatly. These institutions of Forex structure are therefore called market makers. In the meantime Brokerage companies serve as contractor between the banks, dealing centers and commission houses.


Compared with the commercial banks and mega brokerage companies the passive players cannot influence the process of currency price formation. Normally they trail the aim of making payment under export or import contracts, margin speculations, foreign currency hedging, creating joint ventures etc.


As a matter of fact Forex market is widely used for serious matters. Importers and exporters as well as other businesses can suffer significant losses with every little fluctuation of currency prices, that’s why they use different hedging instruments, to name some as futures, forward deals etc.  Despite all the risks Forex remains an important part of any thriving business.


Who Are Market Players


Central Banks


As Forex market makers the main function of the Central bank is to regulate the exchange ratio in the Forex market, in order to deter unnatural currency rates, avoid economic crisis and keep the balance of export and import. The influence of Central banks on the foreign exchange market can be straight - by currency intrusion or roundabout – through money supply and interest rates regulation. The role of the Central bank may alter, it can influence the currency market on its own or together with other central banks. When acting on its own, the central bank influences the national currency, while cooperative action of different central banks is directed to accomplish joint monetary policy in the international market. The main interest of Central banks in Forex market is not the profit but rather verification of stability or correction of the existing national currency exchange rate, which has a leading role in the inner economy on the country. In no case elements as “Bulls” and “Bears” can be characterized to Central banks, while in different situations the actions undertaken by the Central bank can be both “bearish” and “bullish”. Commercial banks can also serve as liaison between the Forex market and the Central Banks. As already stated central banks are not committed to income in the Forex Market, however, they are not after unprofitable operations either, this is why many operations carried out by Central banks are cloaked through the commercial banks operation. It is common for Central banks of different countries to get together for joint intercessions. Central banks that had the greatest intercession on the foreign currency market were:

  • Ventral U.S. Bank - US Federal Reserve (Fed),
  • European Central Bank (ECB),
  • Bank of England (known as the Old Lady),
  • Bank of Japan.

Commercial banks


Most of the currency exchange operations are conducted through commercial banks. The rest of the market participants operate through accounts opened in commercial banks. The summative market demand for currency exchange or investment is formed within banks through client transactions which are then executed in other banks. Dealing with clients is not the only function of the commercial banks, they can also act on their own.  


Forex Market is formed through interbank deals, therefore currency exchange rates or interest rates refer to interbank foreign exchange market. The major international banks are influenced mostly by major international banks with billions of US dollars daily turnover.  These banks are: Chase Manhattan Bank, Union Bank of Switzerland, Deutsche Bank, Barclays Bank, Citibank, Standard Chartered Bank etc. The difference among these commercial banks is the transaction size which bring about considerable changes in currency quotes. More like central banks commercial banks as Forex market big players can operate either as “Bears” or “Bulls”.  

  • Those market participants who are after "Bulls" are those market participants who are interested in adding currency value are the “Bulls”.
  • On the contrary those market participants motivated by currency rates reduction are the “Bears”.

The currency rates change in a rather narrow scope being under constant balancing influence of “Bulls and “Bears”.  In case one of them prevails in the markets the currency quotes fluctuation can have a dramatic result.     
 

Companies Executing Foreign Trade Operations


Importing or exporting companies that participate in international trade regularly require foreign currency. In the meantime, these companies position free currency volumes through short-term deposits. This kind of companies do not access the currency market directly, instead they fulfill their deals through commercial banks.


Companies Operating International Investment


International corporations and companies that signify different international investment funds, investment and money market funds put into practice diversified management of the assets. These companies put their money in safekeeping organizations and corporations of other countries.  In dealer slang it is called simply funds. To name some of the leading and well-known funds: "Dean Witter" fund and "Quantum" of George Soros both operating profitable currency exchange speculations. Some international major corporations participating in foreign currency investment industry are engaged in creation of subsidiaries, joint ventures like Nestle, GE (General Electric) Xerox, BP (British Petroleum) and many more.  


Currency Exchange


There are currency exchanges In developing countries with the economy in transition state, the function of which is to adjust market exchange rates and execute currency exchange for business. Exchange rate is mostly regulated by the state because of the exchange market size.


Brokerage Companies


Brokerage companies serve as liaison between sellers and buyers of the foreign currency exchange market to carry out exchange operation between them dealing in deposit and loan operations.   and the Brokerage firms are bringing together buyers and a sellers of foreign currency and conduct conversion between them, as well as dealing in loan and deposit operations. The profit of the brokerage company is formed from the percentage per transaction. 


All the brokerage companies have recently been using Electronic Communication Network (ECN), some of the most reliable brokers even develop their own electronic trading platforms. These trading platforms ECNs provide currency exchange requests from different buyers and sellers brought together. The clients of brokerage companies are big banks other brokerage firms and also individuals. The limit of access to deposits is usually rather high with brokerage companies, which can be unreasonable for private investors. ECN brokers are assumed to only charge commissions to its clients. 


Individuals


Forex Market participant and market makers are also those individuals who understand the non-trade transactions in salary transfer or tourism and pension transmit as well as selling and buying of money.


Margin trading intrusion into the market makes it possible to invest redundant funds in Forex market with an outlook for income.

 

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