Central Banks:

To protect the interest of the local currency, central banks around the world engage in forex trading. The chairman of the Federal Reserve, or the exchequer, or the governor of the central banks, as they are known in their respective countries, intervenes in the forex market to protect the currency's integrity. They would want their currency to remain competitive and not be overpriced or underpriced. The monetary authorities intervene in the foreign exchange (FX) markets occasionally to counter disorderly market conditions. They do this with a variety of instruments, including exchange rate policy, in which case, they buy or sell their currency to stabilize the exchange rate. When central banks intervene in the forex market, there is always a volatile movement of prices. As a result of the volatility in the market, other market players take one position or the other to take advantage of the moves. Some traders equally stay aloof until the dust settles. We shall revisit how traders take a position in subsequent chapters, especially in the fundamental and technical analysis. However, the intervention of the central banks is less frequent now. The central banks also make speeches from time to time based on the fundamental economic conditions prevalent to move the market. Following the Bretton Woods Exchange-Rate System's demise in 1973, these interventions became necessary. Before that, the currencies of about 44 countries were pegged to the value of the dollar. It was simple to determine the value of the major currencies while the dollar's value was pegged to the value of gold, and there were no interventions.

Central banks intervene in the forex market when the trend in the market vis-à-vis the currency of their country is above or below the benchmark they have set for the economy. Therefore, central banks intervene in the forex market to stabilize the economy or to maintain the desired exchange rate.

As shown in the diagram above, Japan's central bank intervened in the forex market, ostensibly to prevent the Japanese yen from further appreciating, thereby avoiding harm to the economy. The central bank had to depreciate (indicated by the arrow pointing down in the diagram) the yen for the economy of Japan to remain competitive in comparison to the United States of America. Following the intervention, the USD began to rise (the arrow pointing up). The green candles show that the USD is buying off the JPY to counter the sell represented by the red candles before the intervention by the bank. We shall revisit central bank interventions to know how to take advantage of them as traders.

Commercial and Investment Banks:

Interestingly, the most significant volume of transactions in the forex market takes place in banks. The banks, especially the big ones that move the market like the HSB, Dutch Bank, Goldman Sachs, etc. These banks trade forex in the form of a market-making venture. It's basically to provide liquidity for different corporations and also hedge their books in case there is any parity, so they trade the forex in the forex market. The vital thing to note is that banks and corporations have close working relationships. Many other banks do participate in the forex market. The reason for the perception is to make more money and increase the wealth of the shareholders of such banks. Banks, as differently organized, have dealing desks that take care of order exe0cution, market ma0king, and risk management. 

Also Read: Forex Market for Beginners

Another way banks participate in the forex market is by facilitating transactions for their customers. What banks do in this regard is act as dealers for their clients and, in return, make a profit difference between the bid-ask spread. In subsequent articles, I shall explain terms that sound ambiguous.

Investment Managers and Hedge Funds:

Investment managers are also referred to as portfolio managers. These sets of traders are known to handle the trades of mutual funds, hedge funds, pension funds, etc. These are pooled funds that are aggregated for investment. So, the investment managers are responsible for managing these funds on behalf of the unit contributors of the combined funds. The profits that accrue to these funds from the trading activities are shared according to the individual contributions of aggregate members at the end of the investment period, usually stipulated by funds management. 

For the record, hedge funds and investment managers form the second most significant operators in the forex market by volume of transactions, after commercial and investment banks. They also constitute part of the market makers.

Large Corporations:

Corporations are other players in the forex market. These corporations are known to hedge positions so as not to be exposed to unnecessary currency risks. 

These corporations also participate in the currency trading markets as a way to secure the raw materials or parts they need for the manufacturing of their products. Toyota Motor Corporation in Japan, for example, may require parts to be imported from the United States. To pay for and import these spare parts into Japan, the company will need a foreign exchange from yen to dollars, which will complete the job of car manufacturing. They engage in speculative currency trading to determine the correct pricing for the currency of choice for spare parts. The same Japanese company could buy dollars on the spot market or enter into a currency swap to make obtaining dollars for the importation of spare parts from the US counterpart easier and less expensive.

Retail Traders:

These are the traders at the end of the pyramid of the forex market. These sets of traders constitute a bulk of individuals like you and me who speculate in the market for profit-taking. The retail trader has access to the market maker, like the brokers. The broker, in turn, passes the request of the trader to the banks, depending on how such brokers have established their system. Therefore, it is noteworthy to state that retail traders do not move the forex market as such. It is the big players that do. 

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