The Major Forex Participants
The inter-bank market makes up both the majority of most turnovers commercially and the speculation of large amounts trading daily. A large bank may do business trading billions of dollars everyday. Some of the trading is made on behalf of the customers, but much is done by proprietary desks and doing the trading for the account of the bank itself.
An important part of the Forex market usually comes from the financial business activities of companies who seek for foreign exchange to pay for the goods and services. The commercial companies most often trade small amounts fairly as compared to those of speculators or banks, and the trades often have short term and little impact on the market prices. Nevertheless, the trading flows are the major factor in the long-term currency direction of the exchange price. Some of the multinational companies can have an impact which is unpredictable when very big positions are covered because of the exposures which are not widely known by the other market participants.
The National central banks of the countries also play a very important role in the foreign exchange markets. They would try to control the supply of money, inflation, and the interest rates as well and often have either the official and unofficial target rates for their country's currency. They can make of use of their substantial foreign exchange reserves often to stabilize their foreign exchange market.
Milton Friedman argues that one of the best strategies for stabilization is for the central banks to purchase when the rate is so low, and to sell when the existing rates are too high. This means that they trade for the profit on a more precise information basis. The central bank's effectiveness in what is termed as "stabilizing speculation" is very doubtful since central banks will never declare bankruptcy if they make huge losses as opposed to other traders would, and there is no enough evidence that they do secure a profit in trading.
A mere rumor or expectation of the central bank's intervention may be sufficient to stabilize a country's currency, however an intervention described as aggressive may be utilized many times every year in the countries with a dirty float of currency regime, moreover the central banks do not always meet their objectives. The combination of the resources of the foreign exchange market can quickly overwhelm any central bank. Many scenarios of this nature were evident in the ERM collapse, 1992-1993, and in the more recent times in countries of Southeast Asia.
Investment management firms
Another participant is the investment management firms. They usually manage the large accounts on behalf of the clients like pension funds and endowments. They use the foreign exchange market to facilitate the trading transactions in terms of foreign securities. An example, is an investment manager with an international portfolio for equity will need to purchase and then sell foreign currencies in the spot market so as to pay for the purchases of the foreign equities and since the forex deals comes secondary to the actual decision for investments, they are not seen as a speculative scheme with the aim for maximizing the profit.