Hierarchy and the Roles of Participants in the Forex Market

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Forex Market

The Forex platform is built based on a unique structure which is the opposite of typical stock market’s structures. In a traditional stock industry, we find buyers who buy stocks from sellers using platforms like the New York Stock Exchange, the London Stock Exchange etc. On the other hand, the transactions of the FX market are done using an OTC or “Over the Counter” market. This is different and centralized from the exchange market.

Hierarchy of the Participants

Common participants in this market are Commercial banks, hedge funds, central banks, mutual funds, insurance companies, individuals, brokers etc. In the hierarchy of the participants, major banks are on top of the pyramid. Then comes the electronic brokerage services, small and medium-size banks.

After that, we find commercial companies, retail market makers and hedge funds. Lastly, we come to the retail traders like us. From this hierarchy, we can come to understand the importance of the participants based on their position in the hierarchical pyramid.

Role of the participants in the market

Major banks play prominent roles in the platform, and the interbank market is built with the medium and small-sized banks. Using the Electronic Brokering Services or EBS the participants of this platform trade directly. Some of the banks which are larger in size among the others determine the rates of FX with their operations. For the FX transactions globally, these large banks play key roles. They also control the overall supply in the market based on demand. The bid-ask spread is effectively laid down at the lower end of this pyramid. Being an active trader in the CFD trading industry, you must have a clear understanding of the bid-ask price. The difference between the bid ask is called the spread. This is the amount of money you typically pay to the broker along in addition to the commission.

Non-bank participants such as corporations, mutual funds, hedge funds, ECNs and brokers are placed in the second tier and take a greater market share than the retail traders but have less of a foothold in FX corporate business. They get access to the FX market using the banks, which are also popular as providers of liquidity. Because of cross border sales and purchases of finished or raw products, the corporations are considered the significant players in the market. Acquisitions and mergers also create significant change in the supply and demand of the currencies.

To too much volatility from happening in the market, sometimes centralized banks and governments of countries take action against a currency market like Forex using the centralized banks. For example, a centralized bank and governments of a certain countries can buy rupees from the general market and try to sell in a variety of currencies like dollars. This strategy may work to reduce the inflation rate of rupees.

Investors who are at the bottom of the pyramid, tare bound to pay the biggest spread as their trades are executed based on two level. This group plays a crucial role in the fluctuations in the prices of the currencies. The internet is advancing gradually, and due to its triumphant approach, even a small investor can take part in this gigantic FX market. Technology has made it possible for small investors to make a huge amount of profit with a small amount of investment using this popular online trading platform which could not have been conceived of 100 years ago.

At the bottom line, you can be assured that a beginner will never be successful in FX if they do not study the hierarchy properly. Learning a lot about these hierarchical positions will help an investor to be clear about their identity and the Forex platform and support to determine their lot size. They can easily understand the fact that they are not alone in this marketplace and competing with the sharks in the marketwho have the largest investments will not always be a logical decision.