The stakeholders on the Forex

For a long time, the Forex was only for money market, but since the years 2000, it is fully considered as an assets class. The variety of the stakeholders on the Forex increased a lot with the boom of the pension funds as well as the more recent arrival of private individuals. The stakeholders’ variety and their trading time horizons give the Forex an extraordinary liquidity.

On the exchange market, the main present stakeholders are the following :

Banks :

They are the main and older stakeholders on the Forex.  The commercial bank part in the transactions decreased by 20% in 10 years; but they remain majoritory. The main role of the banks is to be brokers; they intervene on the foreign exchange market to convey their clients’ orders, who are other financial institutions, firms or private individuals. During these transactions, banks pay themselves on the spread offered to clients.  Banks also intervene with their own funds on speculative processes nevertheless this is a small part in their activity. The more active banks on the Forex are UBS, Citigroup, HSBC and the Deutsche Bank.

The other financial institutions or institutional investors :

They are the hedge funds, insurance enterprises, pension funds, the Commodity Trading Advisors (CTAs)… Their part in the exchanges on the Forex duplicated in 10 years and in 2007, they represented 40% of the transactions. These institutions have two ways to use the Forex. The first one is to use it as a full assets class. They speculate on the future evolution of currencies in order to have capital gains. The second one is like a hedging instrument. Then, the Forex is use to protect oneself against exchange risk when these institutions invest abroad.

The multinational firms :

With globalization, firms have had to use the Forex to pay their outlay done in foreign currencies. The main objective for them is to cover the exchange risk. So, they use derivative products instead of the spot market. The bigger firms also develop speculative activities on currencies. The transactions part done by firm lightly increases; in 2007 it represented about 17% of the total volume.

The central banks:

They are independent organizations which run the monetary policy of their countries. The main are the American Federal Reserve (FED), the European Central Bank (ECB), the Bank of England (BoE), the Bank of Japan (BoJ). They intervene for their own account, for governments or for supranational organization such as the International Monetary Fund (IMF), the Wolrd Bank or the Bank for International Settlements (BIS). Their main activity is to run the currencies reserve of the different organizations but they sometimes intervene independently or together to have an influence on the currencies rate in order to maintain a certain monetary stability.

Private individuals :

Now, technological advances enable private individuals to invest on the Forex. The private individuals’ activity has been developing a lot since 2002 and rises by about 30% each year. Formerly marginal, the private individuals’ activity new represents about 2% of the total volume. The private individuals more often intervene thanks to trading platforms on internet connected to retail brokers who aggregate their orders and then transmit them to great banks which carry out the orders on the money market.

The automated trading :

The resort to automated negotiation, also called algorithmic negotiation, has fastly developed since 2005. Today, the automated trading seems to represent 20% of the spot transactions volume. This phenomenon, stimulated by the apparition of electronic negotiation platforms, enabled certain financial institutions, in particular the hedge funds, to take advantage of the new technologies, like high frequency operations. Most of these strategies are switch strategies between the different cash providers; that standardizes the proposed rates. We also find trend following or restructuring strategies. At the same time, a lot of financial institutions have been able to use the algorithmic trade to increase their efficiency. For example, small spot operations can be lead to “autonegotiation motors”, that makes physical operators free so they can concentrate more on complex operations, while hedging operations can be automated to improve the risk management.