Lesson 2 : Market Participants

Unlike a stock market, the foreign exchange market is divided in to levels of access. At the top is the inter-bank market, which is made up of the largest commercial banks & securities dealers. Within the inter-bank market, spreads, which are the difference between the bid & ask prices, are razor sharp & usually unavailable, & not known to players outside the inner circle. The difference between the bid & ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee massive numbers of transactions for massive amounts, they can demand a smaller difference between the bid & ask price, which is called a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there's usually smaller banks, followed by massive multi-national corporations (which need to hedge risk & pay employees in different countries), massive hedge money, & even a number of the retail FX-metal market makers. According to Galati & Melvin, “Pension money, insurance companies, mutual money, & other institutional investors have played an increasingly important role in financial markets in general, & in FX markets in particular, since the early 2000s.” (2004) In addition, they notes, “Hedge money have grown markedly over the 2001–2004 period in terms of both number & overall size” Central banks also participate in the foreign exchange market to align currencies to their economic needs.