Forex Market Players

FX Market Participants
While the foreign exchange market was traditionally exclusive to all but a select group of large banks, advances in technology and reductions to capital flow barriers have brought in a variety of new participants. Because all of these participants affect the supply of and demand for currencies, it is important to know the role each play in the market.

Commercial and Investment banks make up the Interbank market and trade on electronic brokerage systems (EBS). These banks trade among themselves via strong credit relationships, and account for the largest portion of FX trading. They trade on a proprietary basis (they trade for themselves) and through customer flow (they fill orders for clients outside of the Interbank market). The Interbank market consists of the world's largest commercial and investment banks and caters to the majority of commercial turnover as well as enormous amounts of speculative day-trading volume.

Corporations primarily use FX to hedge against currency depreciation, which would affect future payments. They also buy and sell currencies in order to meet payroll for international offices. Foreign exchange plays an increasingly important role in the daily business of corporations, as globalization forces them to make and receive payments in foreign currencies. When international transactions of goods are made, a transaction of currency is also necessary. Whether it is to pay employees abroad or to pay for products coming from a foreign nation, corporations must exchange their local currency for the domestic currency of the nation with whom they are trading.

Global Managed Funds
Many profit seeking managed funds invest in foreign financial instruments. When they purchase and sell these instruments, an FX conversion is always necessary. Global fund managers (large mutual, pension, and arbitrage funds) invest in foreign securities and other foreign financial instruments. These investments can have substantial impacts on spot price movements because such firms constantly re-balance and adjust their international equity and fixed income portfolios.

Individuals
With the advent of online currency trading, retail investors now have total access to the spot FX market. They trade in FX for both speculative and hedging purposes. This retail spot currency trading is the new frontier of trading around the world. Up until 1996, foreign exchange trading was only available to banks, institutions and extremely high net-worth individuals.

Recently FORBES business magazine published it's "400 Richest People in America" issue. It is highly recommended you read it because you will find many references of FOREX trading. One of the most famous of the wealthy elite is a man named George Soros who was recently ranked the 26th Richest Person in America.

Soros, the hedge-fund manager who made trading history in 1992 by trading against the British Pound, correctly bet that the British Pound would decline in value against the Euro, the Canadian Dollar, and the Australian Dollar. It was disclosed in 2003 that he had taken a short position. His statement would have made a huge impact ten years ago, when hedge funds had the potential to significantly influence the value of important international currencies. In fact, in 1992, Soros made an estimated $1 billion profit by helping push the British Pound out of the European Exchange Rate Mechanism, earning him the title "The Man Who Broke the Bank of England".

Bank of America reported in its 2002 annual report a $530 million profit from foreign exchange trading revenue under “Global Investment Income”. Meanwhile, it reported only a $384 million profit from trading stocks, and a $86 million profit from commodities trading.

It is not uncommon for a large bank to trade daily, billions of dollars. Some of this trading activity is done on behalf of corporate customers; however bank dealers are performing a large amount of trading to make the bank profits. The financial statements of a majority of banks throughout the U.S. will denote income received from foreign exchange trading.

The commercial companies’ international trade exposure is the backbone of the foreign exchange market. Companies such as Siemens, Nestle, Toyota, BP Amoco, Volkswagen, Intel, Dell Computers, Dow Chemicals, Monsanto, Merck Pharmaceuticals, SmithKline Beckman, Lufthansa, Caterpillar, Union Carbide and Kodak have traded or continue to trade heavily in foreign currencies. Most of these companies established in-house trading facilities or subsidiaries to manage their currency trading.

Caterpillar established its special currency management group back in 1986, when it reported a $100 million profit on foreign exchange that turned its $24 million operating loss into a $76 million profit for that year.

DaimlerChrysler threw itself into major investment headlines in late 2003 when it acknowledged that more than half of its 2Q 2003 operating profit was generated by currency trades – making more money on foreign exchange than in selling cars. The car maker reported quarterly operating profit of €641 million ($1 billion), beating some analysts estimates. The company says approximately €350 million of this profit was generated in foreign exchange.

In a recent interview, Warren Buffet, perhaps the most successful investor in history, and Chairman of Berkshire Hathaway, Inc., stated “Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in, and today holds, several currencies.”