The inter-bank market caters for both commercial turnover and speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers as well as for its own proprietary desks which trade for the bank’s own account. Until recently, foreign exchange brokers did large amounts of business, facilitating inter-bank trading and matching anonymous counterparts for small fees. Today, however much of this business has moved on to more efficient electronic systems.

Central Banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and interest rates. Often they have official or unofficial target rates for their currencies. They can use their substantial foreign exchange reserves to stabilise the market. Additionally the mere expectation or rumour of central bank intervention might be enough to stabilise a currency, but aggressive intervention might be used several times each year in certain countries.

An important part of the Forex market comes from the financial activities of companies seeking foreign exchange to pay for goods and services. Corporates are inclined to use forwards to hedge their import/export exposures. They often trade smaller amounts compared to those of banks. Nevertheless, their trade flows are an important factor in the long term direction of a currency’s exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Hedge funds have gained a reputation for aggressive currency speculation. They control billions of dollars under management and may borrow billions more. Hedge funds are motivated to trade Forex to generate favourable returns and they tend to be more aggressive in their trading tactics. Hedge funds have now become an important source of liquidity besides the traditional inter-bank market.

The growth of retail market in recent years owes much to the penetration of Internet and related technology as well as the evolution of electronic FX platforms. The retail market is growing at about 30% per year, helped by the rapid increase in affluent and high net worth individuals, especially in Asia where retail Forex margin trading is particularly popular. Though retail market generally does not affect the currency prices singlehandedly, they form an integral part of the Forex market which cannot be ignored.