FX Market Structure 101- Market Participants

Education /
18 Aug 2015

There are a variety of participants in the foreign exchange market, from small retail traders trading several thousands per day to the large hedge funds and corporations who trade several billions in a single day. While there is a large number of participants in the market with different goals and motives, we can generally put them into a few categories to understand more easily how the FX market functions.

Central Banks – Central banks intervene in the market when their currency becomes a problem for the domestic economy, by either being too strong or too weak. This applies to all exchange-rate regimes – the floating, pegged and fixed. For example, the SNB has been very active during the past few years, when it has tried to weaken the Swiss Franc against the Euro. Further, we can take the Hong Kong Dollar as an example for the pegged exchange-rate regime. The USD/HKD is allowed to trade within a 7.75 to 7.85 range, which means that the Hong Kong Monetary Authority (HKMA) will sell it when it gets too close to the upper range and buy it when it gets too close to the lower range of the band. Central banks are also active in the market when they have to manage their foreign currency reserves. For example, if the HKMA has bought US Dollars to weaken the Hong Kong Dollar, it may wish to exchange those US Dollars into another currency, like the Euro or the Australian Dollar. The Asian central banks are quite often doing this, as they have to intervene much more than central banks in, say, Europe, where most currencies are floating.

Commercial ParticipantsThis group includes various corporations, like multinational firms or exporters/importers. Their main goal is not to make a profit from trading, but rather to hedge their currency exposure or get the foreign currency they need to pay their workers in other countries and similar.

Leveraged Participants Hedge funds are the most prominent members of this group. While there are several types of hedge funds, the ones that are most active in the FX market are the global macro funds and the currency funds. Macro funds trade in many markets globally, while currency funds are focused on opportunities in the FX market. Hedge funds can handle huge positions in the FX market and are hence important participants. Many traders are probably familiar with the story of how George Soros broke the Bank of England in 1992. While the hedge fund industry has changed a lot since then, they still can have a large impact on markets, especially when many of those funds go after the same trade, like the long USD/JPY trade in 2013. This category also includes some smaller participants, like CTAs and system funds.

Real Money – Investment funds that do not use leverage, hence the term 'real money'. Those are usually pension and mutual funds, who manage large sums of money and use the FX market for transactions when dealing in foreign securities. For example, buying a large amount of UK stocks at the London Stock Exchange, will require the purchase of the local currency, in this case the Pound Sterling.

Sovereign Wealth FundsState-owned investment funds that manage the country‘s money and invest it in various markets. They usually exist in countries that have large inflows of foreign currency, like i.e. Qatar from selling Natural Gas or Kuwait from selling Oil. SWFs manage huge amounts of money and hence, their transactions can have a significant impact on the FX market.

Dealing Banks Banks are the main market makers in FX and the interbank market represents the core of whole market. The individuals dealing currencies at the bank are called dealers.

Prime BrokersFirms that offer liquidity, leverage and supporting services to other market participants. Most major banks have prime brokerage operations, but there are also non-bank prime brokers active in the business. The clients of prime brokers are usually other institutional participants, but in some cases, an individual trader can also use a PB, if he meets the requirement set by the broker.

Retail Brokers Brokerage firms that allow retail traders to access the FX market. They can be market makers, STP brokers or an ECN. Market makers take the opposite side of all the client’s trades and is basically acting as dealer, not a broker. STP (straight-through-processing) brokers direct most or all orders directly to the market, while an ECN allows you to trade with various other participants and the broker has no conflict of interest at all.

Proprietary Trading Firms Firms that hire individual traders to trade the company’s money and give them in return a certain share of the profits they have realized. The trader can benefit from professional tools that would be too expensive to purchase as an individual, a network of fellow professional traders and capital allocation that can easily reach seven-figure amounts for successful traders.

Retail TradersIndividual traders who usually access the market through a retail broker, but may also use a prime broker if they have the necessary capital. Given the small amount of money needed to open a trading account, retail traders have the ability to access varying ranges of leverage, mostly from 200:1 up to 400:1. It is difficult to estimate the volume of global retail trading, but the latest estimate (April 2015) was $346 billion per day. Volumes have been steadily rising and this trend is unlikely to change soon, as the currency market remains very attractive to individual traders.


Where AxiCorp is active

Axi - A leading retail FX broker with excellent 24-hour service, tight spreads and fast execution with minimal slippage.

AxiPrime - A prime broker with deep liquidity, established global relationships and highly competitive pricing. AxiPrime is regulated in the UK and Australia and offers clients 24-hour multilingual customer support and a product range of over 50 major and minor currencies, their cross rates, precious metals, commodities and index CFDs.

AxiSelect - AxiSelect reaches out to those retail traders with the skills and knowledge to succeed in the market as a professional, but who may not have the independent means to fulfil their potential. We provide funding and professional development to help these traders progress.


Contributed by Milan Cutkovic 

The information provided here has been produced by third parties and does not reflect the opinion of Axi. Axi has reproduced the information without alteration or verification and does not represent that this material is accurate, current, or complete and it should not be relied upon as such. The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted. 

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