The forex market, also known as the foreign exchange market, is the largest financial market in the world, with an average daily trading volume of over $6 trillion. It operates 24 hours a day, five days a week, allowing traders to buy, sell, and exchange currencies globally. But with such a massive market, a common question arises: Who controls the forex market?
Since the 2000’s, Forex continues to grow. The daily trading volume rose from 1420 billion in 2001 to 4000 billion IN 2010 and $6,000 billion today. This growth is due to the increase of the number of stakeholders. Initially, the Forex was just an interbank market but the advantages of this market have gradually attracted new actors.
Here are the stakeholders that we find today on Forex. But before that, we must first understand how the Forex markets work.
Understanding the Decentralized Nature of Forex
First and foremost, it’s important to know that the forex market is decentralized. Unlike stock markets, where trading occurs on centralized exchanges like the New York Stock Exchange (NYSE), forex trading happens over-the-counter (OTC). This means there is no single central authority or exchange that controls the forex market. Instead, it’s a network of banks, financial institutions, corporations, and individual traders connected through electronic platforms.
The Key Players in the Forex Market
While no one entity controls the forex market entirely, several key players have significant influence over it. Understanding these players can provide insights into how the market operates and what factors drive currency prices.
Commercial banks
These are the major’s stakeholders on the Forex with about 43% of transactions. Therefore they have a strong impact on the foreign exchange market. Among the most active banks most active on this market, there are Deutsche Bank, UBS or Barclays. In most cases, banks trade on behalf of their clients. These clients are other banks, financial institutions and or individuals. Banks also process their own account for speculative purposes but this share remains small relative to the total of transactions.
Central banks
The key ones are the U.S. central bank (FED), the European Central Bank (ECB), the Bank of England (BoE) and the Bank of Japan (BoJ). Although their share in the total of transactions is small, they play an important role and significantly influence the evolution of all exchange rates. Indeed, central banks are in charge of monetary policy of their country. They decide on interest rates in their country or area but can also perform open market operations. Their actions are made to manage foreign exchange reserves but can also to stabilize a currency, especially in times of crisis. Central banks represent about 8% of transactions.
Institutional investors
They are mostly pension funds, hedge funds or insurance companies. These financial institutions have important resources; their share in the total of transactions is growing fastly. Today it is estimated they represent about 30% of transactions and it is estimated that in a few years they will become the actor number on the forex market.
For investment funds, Forex is mainly used for speculative purposes but can also be used to cover investment in other asset classes. This is particularly the case of insurance companies which must limit their risk exposure due to their business activity.
Multinational corporations
Most of big companies today operate on the Forex. This market allows them to hedge against currency risk. Indeed, companies have customers worldwide who therefore use foreign currency. These companies are most often on the futures market. Only a few speculative operations lead companies to intervene directly on the exchange rate. Some companies also have their own trading room. Multinational companies represent approximately 17% of transactions.
Individuals
More and more individuals are interested in the foreign exchange market in a purely speculative way. It is estimated that the activities of individuals increase about 30% per year since 2000. However, their share in total transactions is small and currently represents about 2%.
Individuals do not directly trade on the foreign exchange market but through broker’s trading platforms. These brokers are customers of major banks that provide access to the interbank market and therefore liquidity. The way the order is transmitted on the market depends of the type of broker.
The chart below shows the evolution of the share of all different stakeholders in the total of transactions:
Conclusion
So, who controls the forex market? The answer is that no single entity has complete control. Instead, it’s a complex, decentralized market influenced by various participants, including central banks, commercial banks, hedge funds, corporations, and retail traders. Each of these players contributes to the ebb and flow of currency prices, making the forex market one of the most dynamic and challenging financial markets in the world. Understanding the roles and influences of these key players can help traders make more informed decisions and navigate the ever-changing landscape of forex trading.