There are various entities in the FX market arena. Each trades for its own financial objective. The following are the main FX participants.
Within the foreign exchange market national central banks play a very important role. Ultimately, the objective of central banks is to keep inflation low and steady by controlling money supply. One of the most important responsibilities of a central bank is the restoration of an orderly market in times of excessive currency rate volatility.
Many times, the mere speculation of central bank intervention is enough to stabilize a currency. However, in the event of aggressive intervention the actual impact on the short term supply/demand balance can lead to the desired moves in exchange rates.
The inter-bank market provides for both the greater part of commercial turnover as well as huge amounts of speculative trading on a daily basis. The type or trading that banks do can be divided into two. First, trading on behalf of the banks customers. Here instructions are given to the bank by the individual customer to buy or sell a specific amount of currency. The second type of trading is proprietary trading. Proprietary trading simply put is when the bank's dealers trade the bank's capital to make the bank a profit. A very large part of interbank trading takes places on electronic broking systems.
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