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Forex trading deals with certain institutions that make it possible for deals in the business to push through. Without these institutions, it would be hard for currency investors to go through what they do, that is, buying and selling of currencies from all over the world. These institutions are known as important role players in the currency market.
Banks play a major role in forex trading. The interbank market for currencies caters to both the majority of commercial turnovers in currency deals. Large amounts of speculative trading are made on a daily basis through banks. Major banks usually trade currencies in the billions of dollars daily on behalf of customers. In the past, foreign exchange brokers did the majority of currency trading facilitating inter-bank transactions and matching anonymous counterparts in exchange for small fees. Today, the majority of the trading going on daily has been effectively moved to more efficient electronic systems.
National central banks also play an important role in the daily activity of foreign exchange markets. It is the central banks that have the power to control the money supply, inflation, as well as interest rates in a certain country. The central banks often have official or unofficial target rates for their currencies. They use their substantial supply of currency reserves to try and stabilize the local market. The role that central banks play in currency trading is held in such high regard that the mere expectation or rumor of central bank intervention might be enough to help stabilize a certain currency. But too much intervention might also result in the opposite.
Private commercial companies also play a role in the currency market. An important portion of the money market can be attributed to the financial activities of companies seeking foreign currencies to pay for goods or services required in certain countries. Commercial companies usually deal with the foreign exchange trade in fairly small amounts compared to those of banks or speculators. Their primary aim in being a player in the market is the need for valuable foreign currencies needed by the company to do business and grow. For this reason, forex trading done by commercial companies has a short term impact on the foreign exchange market rates. But trade still flows between commercial companies, both foreign and local, are considered important factors in the long-term direction of a certain currency’s exchange rate. The impact of commercial companies on the exchange rate may come as an indirect result of trade.
write by Rachael Morrison