The forex market sits at the
crossroads of global trade and international finance and investing. Whether
it's a U.S. conglomerate managing its foreign affiliates ‘balance sheets or a
German mutual fund launching an international stock fund, they all have to go
through the forex market at some point.
Participants in the forex market
generally fall into one of two categories: financial transactors and
speculators. Financial transactors
are active in the forex market as part of their overall business but not
necessarily for currency reasons. Speculators
are in it purely for the money.
The lion’s share of forex market
turnover comes from speculators. Market estimates suggest that upwards of 90
percent of daily FX trading volume is based solely on speculation. We look at
the types and roles of speculators later, but here I want to introduce the players who are
active in the forex markets for nonspeculative reasons.
Financial transactors are
important to the forex market for several reasons:
- Their transactions can be extremely sizeable, typically hundreds of million or billions.
- Their deals are frequently one-time events.
- They are generally not price sensitive or profit maximizing.
Add up those reasons and you’re
looking at potentially very large, one-off trading flows that are not really
concerned with where the current market is trading or which way it’s headed.
They enter the market to do their deal and then they’re gone, which can
introduce an element of market inefficiency that can allow traders to take
advantage of counter-trend movements.
