Easy access to the Forex market has increased its popularity to unprecedented levels among individual traders. Nevertheless, retail trading represents only a very small percentage of the total value of transactions in the currency market, which amounts to $ 5.1 trillion per day. This is why it is necessary for a novice trader to become acquainted with other major groups of Forex market participants. This article provides some information on the various categories of traders in the currency markets and the roles they play.
As in any other financial market, the Forex market consists of two main categories: individual traders (retail traders) and institutional traders (institutional). There are subcategories of these major categories which we list in the following lines:
Retail Forex Traders
This category includes traders who use their personal capital to trade in the Forex market. The retail trader uses his own money to trade via an account that he opens with a brokerage firm. The share of retail traders does not exceed 7.5% of the total trading volume in the Forex market. Ironically, the currency market would not have enjoyed this popularity without the presence of this type of trader. Depending on the time frame a retail trader prefers to work on, it can be classified as a daily trader, a swing trader, or an investor. Retail traders can also be classified into full time and part time traders.
Institutional Forex Traders
Institutional trading involves using a company’s capital to trade in the currency market. This type of trading accounts for up to 92.5% of the total trading volume in the Forex market. Nevertheless, it should be noted that making profit may not always be the main objective for this type of market participants to participate. Institutional trading firms have a huge impact on volatility and liquidity levels in the currency market. Below we review the different types of institutional traders in the Forex market.
Companies involved in the cross-border exchange of goods and services need foreign exchange to ensure a smooth export and import movement. Moreover, these companies resort to participating in the Forex market with the aim of reducing the risk of fluctuating exchange rates through hedging deals. Major companies regularly implement contracts worth billions of dollars to meet their commercial needs and reduce financial risks.
Hedge funds are mainly classified as short-term speculators in the currency markets. Hedge funds are known for the speed and flexibility to enter and exit deals. It mainly relies on its entry on important news such as non-farm employment reports, change in unemployment, inflation, retail sales and GDP growth.
Insurance companies and pension funds
These companies aim to achieve profits slightly above the rate of return on savings with banks. That is why insurance companies and hedge funds prefer trading on long-term trends in the currency markets. Nevertheless, these companies take strict precautionary measures in dealing with the assets of their clients because they are classified as public funds and therefore their activities are subject to government accountability and oversight.
Trading offices are one of the main divisions of most major commercial banks. These divisions undertake the functions of trading in the Forex market on behalf of the bank’s high net worth clients and also for its own account. There is an interconnection between different banks through major trading platforms such as Electronic Brokerage Service (EBS) or Reuters platform. The inter bank market is the backbone of the spot currency markets, as it allows major companies, banks, hedge funds and other non-banking financial institutions to exchange currencies safely and easily.