Market participants : the "food chain
By tracking short-term fluctuations in currency pairs, it is just as easy to lose sight of general market trends as it is to overlook the broader trading ecosystem by focusing on minor fluctuations in open positions.
Marketplace - is a full-fledged world with the widest range of participants from private traders like you to interbank networks and central banks. Acting as a individual retail traderIf you are at the bottom of the food chain, you are a small fish. Although you can buy and sell the same currency pairs as other participants, you have to go through longer transaction chains than others in order to get liquidity, because you do not get the same prices as other market participants higher in the hierarchy.
You cannot influence the market with your trades because you are too small to "create a wave. Your role here is to Respond correctly to what's going on in the market in general and with you in particular. While it may seem like a disadvantage, there are advantages to this state of affairs as well. When you begin to understand exactly what events affect trends, how they happen, and why, you will reach an important level as a trader. By understanding the broad structure of the market, you will be able to make the right choices and reduce the chance of chance while trading.
Involvement of the Government and Central Banks
Central banks, for example, Bank of England, the Fed, and ECB They manage the money supply and interest rates and supervise commercial banking systems. They are the blue whales of the foreign exchange market. As part of their competence in managing growth and currency stability, central banks provide huge impact on the market .
As part of open market operations, central banks control money circulation and stabilize interest rates through repurchase agreements (repos) with commercial banks (primary dealers). Repurchase agreements work effectively to increase the money supply in the economy when central banks lend funds (by purchasing treasury bills from the banking sector) or in the case of reverse repurchase agreements to withdraw funds from circulation during tapering (by selling treasury bills to the banking sector).
When costs outstrip production (demand exceeds supply), prices rise, and this is called Inflation. Faced with inflation, banks also have the ability to directly raise interest rates, making lending more expensive and increasing the cost of servicing current loans, the outlook for the lending sector becomes bleaker. When production outstrips spending (supply is higher than demand) - prices fall, and this is called by deflation. Faced with deflation, central banks can lower interest rates, reduce the cost of lending, which will have the effect of lowering the cost of servicing current loans and making lending prospects brighter.
What is really worth realizing is that the free market exists within a very fragile ecosystem that is held in balance by the occasional central bank intervention. There are several reasons why central banks are at the top of the food chain. They are the only ones in the financial system who can create and withdraw funds, set interest rates, influence market expectations, and hold impressive foreign exchange reserves (the most popular being the U.S. dollar and the euro). The impact that central banks can have on the market through adjustments to their own foreign exchange reserves can be quite impressive because of the volume of transactions.
Participation of institutional dealers in the market
These are banks and financial institutions; Institutional dealers provide liquidity to the foreign exchange market. Dealers trade with each other on the interbank market, electronic communication network (ECN)The interbank market is a chain of institutional dealers that trade currencies with each other to maintain liquidity in the banking system. Generally speaking, the interbank market is a chain of institutional dealers that trade currencies with each other to maintain liquidity in the banking system. According to data collected by the Bank for International Settlements in 2013, the interbank network generates about 40% of market turnover per day, which is $5.3 trillion.
Banks and large financial institutions trade with each other to make sure they have enough liquidity to meet the needs of their clients. Their clients include smaller banks without the credit relationships needed to participate in the network, companies that need foreign exchange as part of their import and export cycles, -brokers acting as intermediaries between large banks and retail traders, and private clients who need access to funds and credit services. These institutions can borrow directly from central banks at wholesale prices, allowing them to access liquidity at better prices than other market participants further down the chain. Their profits come from liquidity premiums paid to smaller institutions, companies, brokers and private clients.
Prime Dealers set exchange rates for traded pairs. is a fully decentralized marketwhere there is no single price for any currency pair, but each institution has slightly different quotes from the others depending on supply and demand dynamics. When we announce prices to our clients, we find the best bid and ask price difference from our liquidity providers and execute your orders at the weighted average price after charging a cTrader commission or adding a small mark-up to the spread (MT4).
As part of the course of their monetary policy, central banks set overnight rates (known as the main refinancing rate in Europe and the federal funds rate in the United States). Institutional dealers use these rates to borrow and lend to each other. In practice, the complex needs of the global economy mean that these rates are constantly changing. Due to the different conditions of supply and demand, the actual rates on these transactions are constantly changing. This rate is known as Libor.
The difference between Libor rate overnight and the target rate set by the country's or region's Central Bank indicates the amount of liquidity available in the market. A lower Libor rate indicates a higher volume of liquidity than required and may cause a decrease in the specified currency; a Libor rate above the CB target rate indicates a high demand, low liquidity and may cause an increase in the specified currency.
The open market operations mentioned above are a tool used by central banks to control the amount of liquidity in the economy, as well as the real overnight rates charged when there is a mismatch between them and the rates set by the central bank, threatening the rate of monetary policy of the Central Bank.
Participation of multinational companies
Being two steps away from central bank liquidity, we see that there are companies that also need access to foreign exchange markets. Businesses are the biggest customer for institutional dealers. This is the case because currency has an important influence on international trade. Any international transaction involving the sale of products or services to customers or purchases from suppliers requires the purchase and sale of foreign currency. Globalization has made currency transactions an integral part of business cycles.
For example: An American consumer electronics manufacturer orders components for its new product line from Japan. From the time of the order in six months, it must pay for the order in Japanese yen. The company needs to buy huge amounts of yen for U.S. dollars to make the payment. Such purchases can have a significant impact on the USD/JPY pair at the time of the transaction. However, by the time the payment is made, the yen may have risen against the dollar, making the order more costly for the U.S. company, and reducing profits. The company may decide to exchange dollars for yen in advance to be sure of the final price of the transaction, however, since this is a large order, it is unlikely that the company has enough reserves to buy the required amount of yen and hold it until payment is made.
To hedge against the risks of unfavorable rate changes, a company may decide to conclude a futures contract with the other party. This is done in order to protect itself from market volatility and to obtain guarantees that in six months the company will be able to buy the necessary amount of yen to fulfill its obligations.
Another reason why it is so important for international companies is that when doing business in the foreign exchange markets, they regularly require repatriate funds. Depending on the size of the company, these can be very large currency transactions that are split into separate orders, increasing the value of the respective currencies.
Traders: the youngest link in the market
Traders are probably the most diverse group of market participants. Their influence depends on the capital they have at their disposal and how high up they are in the hierarchy of liquidity they receive from suppliers. In fact, it can put a trader in any part of the food chain. Nevertheless, one thing all traders have in common: they are not a business tool, That's what business is for them. Traders are not interested in using a to hedge the risks of future purchases, or buying traded currencies. Traders are only concerned about profit from price fluctuations, and market conditions that allow them to trade in the largest and most liquid market in the world.
Hedge Funds are the most influential groups of currency speculators and can easily influence the value of currencies because of the sheer size of the trades they make regularly. They are also the most knowledgeable and experienced market participants. Hedge funds invest on behalf of individuals¸ pension funds, companies, and even governments. They use a number of different techniques, including situational trading, algorithmic trading, a combination of both, and fully automated high-frequency trading. They have very deep and powerful tools to create tangible waves in the market.
You may be surprised, but the most famous currency speculation of all time was by a private trader. In 1992 George SorosThe investor, who became known as "the man who brought down the Bank of England," bet $1 billion (his entire fund) at 1:10 leverage, that is $10 billion, on a decline in the pound to the German mark. The logic behind the deal was that the pound was overvalued because the Bank of England had refused to devalue the currency since joining the Exchange Rate Management Mechanism (ERM) in 1990. Within 24 hours, the pound collapsed by about 5,000 points. Soros closed his position a month later, benefiting from the appreciation of the German mark, and walked away with more than $2 billion. Of course, as a retail trader, you're a long way from George Soros' level. Even with maximum leverage, your participation in the market is very far from the volumes that investors like Soros can afford.
If you are dealing with market makerIf your buy orders are not filled, your buy orders are compensated by identical sell orders from other clients. By forming orders in this way, brokers can maintain the balance of risks they need. However, in practice market maker accounts rarely correspond to this state of affairs, which creates the need to hedge risk by making their own counter-positions in the real market. At this point a conflict arises, when the broker plays against your orders, and your profit becomes a loss for the broker, and vice versa, the broker's loss becomes your profit. Brokers like FxPro operate in a non-market-maker model, without assuming risk; clients' orders go directly to the dealing desk of institutional liquidity providers. When you work with real STP/ECN brokers, you get the best price offers from a number of liquidity providers, and your orders are executed at a weighted average price.