Central Banks in most countries have the ultimate control over money supply and interest rates. They intervene to regulate market fluctuations for freely convertible currencies by using their foreign currency reserves or by influencing interest rates through Money Market operations.
Commercial banks are market makers that quote two-way spot FX prices that are continuously changed so as to allow them to balance supply and demand for the currencies. In the currency markets the interbank exchange rate is the wholesale price and the commercial exchange rate is the retail price.
Brokers are intermediaries that convey the market prices received from banks via electronic or telecommunications networks to other market participants. These rates do not serve just as an indication, but are the prices at which they are willing to deal, usually for an accepted marketable amount.
Corporations traditionally have been entering into currency transaction in order to hedge (cover) their foreign currency exposures so as to minimize risks. Corporations today are increasingly adopting more aggressive policies and actively take positions in currencies. Large multi-national corporations even have their own in-house dealing rooms and credit control departments, but the majority of corporations still conduct their currency transactions through brokers.
Many smaller investors today are purchasing shares in mutual funds. Some of these funds have in excess of US$ 1 billion in assets and are managed by one or more fund managers. Depending on the liquidity, trading strategy and overall policy of the fund, the fund managers would invest a certain percentage of these funds in the Foreign Exchange market. Today, the transaction size and volume of some funds exceed that of some Central Banks.
These institutions are not very active market participants, but in certain circumstances, they can inject large funds into the foreign exchange markets; this is mostly carried out by developing countries where import and export business is channeled through government monopolies.
The Individual Investor
The volume and the number of transactions entered into by individuals has been increasing rapidly. Today, a growing number of individual investors are trading in spot currencies and the futures markets by depositing collateral into margin accounts with brokers such as ICM Brokers. These investors are now gaining in importance and are having short-term influence on exchange rate movements during illiquid market conditions.
What Every Trader Should Know
The spot FX market is one of the most popular markets for speculation due to its enormous size, liquidity and tendency for currencies to move in strong trends. An enticing aspect of trading currencies is the high degree of leverage available. ICM Brokers allows positions to be leveraged, in some cases, up to 400:1. Without proper risk management, this high degree of leverage can lead to enormous swings between profit and loss. Knowing that even seasoned traders sometimes suffer losses, speculation in the spot FX should only be conducted with risk capital funds that if lost, will not significantly affect one's personal financial well- being. @@@SF@@@