Lesson 5: Who are the Participants of the Forex Market?

Structure of the Forex Market

Now that you are considering being a forex trader in Kenya, or you have already started trading, are you sure you know the person you are trading with? First things first, you are not trading with the computer or the cloud, or the virtual space.

Unlike the stock market where trading operations are centralized, the forex trading market is decentralized. The stock market is controlled by one body which regulates prices. For example, when trading stock in Kenya you deal with the prices set by Nairobi Stock Exchange, New York Stock Exchange in the U.S. and London Stock Exchange in the U.K.

In the forex market, the big boys are many, so the prices are determined by the forces of demand and supply. Who are these big fishes, who are the tilapias, and who are the omena?

The Big Fish (Major Banks)

These are the fishes that determine cost of living in the water. Major Banks such as Citi Bank, Deutsche, Barclays, and JP Morgan drive the forex market through interbank forex transactions. They create the bid/ask spread based on the prevailing forces of demand and supply, just as big fish determine the spread of minnows in the fish market of Indian Ocean.

Large Multinational Corporations

Companies operating across national boundaries need to exchange currencies when transacting business in a foreign country.

For example, Coca Cola first needs to exchange their dollars for Kenya Shillings in order to purchase fruits from Kenyan farmers.

The volumes of forex traded by these firms are much less than those traded in the interbank market. However, their activities surely influence exchange rates.

Government Institutions

Major government institutions such as central banks and treasuries also participate in the forex market. They exchange their currencies to facilitate government operations and international trade. Central Banks also influence foreign exchange rates by adjusting interest rates as a monetary policy to control inflation.

Speculators

These are the small fish. Kamau, Kipruto, Chris Kirubi and Warren Buffet belong to this group. Speculators are people who buy or sell currencies in the spot market in anticipation of a profit.

Some of them are filthy rich, others walk barefoot in Mutinda market. But they collectively contribute 90% of all forex trading transactions.

You can be a member of this small fish family, but you need to be patient and learn.

Disclaimer

Forex trading involves significant risks. Do not invest in Forex trading with borrowed money. Do not trade if you have not paid your rent, and do not trade if you have an outstanding fees balance for your children.

Everybody loses at some point. Trade with money that you can afford to lose, otherwise you might run naked on the street or have your relatives mourn while you hang on the roof.

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