Market makers are the foreign exchange dealers in commercial and investment bank dealing rooms quote exchange rates in the inter-bank market, that is, between banks. They quote prices at which they are prepared to buy or sell currencies and therefore make a market. The activity of FX dealers can be speculative where they try to make a profit from anticipating exchange rate movements.


Another part of their activity involves quoting prices both internally and externally. Internally would involve quoting prices to the other dealing desks within the dealing room, for example, to the currency options desk, interest rate derivatives desk, FX forwards desk, money markets desk and the proprietary trading desk. Externally would involve quoting prices to their customer base, for example, international corporations or fund managers. In recent years, consolidation of the banking industry has led to a contraction of active market makers. The BIS 2001 survey reveals that, in the UK, 17 banks captured 75% of the market activity in 2001 compared to 24 banks in 1998 and 20 banks in 1995. In the US, the data indicates that 75% of FX transactions was conducted by only 13 banks in 2001 compared to 20 banks in 1998 and 1995.

Brokers do not quote their own exchange rates; they are not market makers. Rather, they act as intermediaries between the market makers and relay the best prices, trying to match buy and sell orders. The broker will not reveal the name of the counterparty making the quote until a positive commitment has been made by another counterparty. The broker makes a commission, charged to both counterparties to a transaction. In the past, brokers were particularly useful to smaller market makers who might otherwise have found it difficult to obtain a competitive market rate. However, the introduction of electronic broking in recent years, together with the introduction of the single currency (the euro), has greatly diminished the role of the voice broker.

Banks such as the European Central Bank (ECB), the US Federal Reserve Bank, the Bank of England, the Swiss National Bank, and the Bank of Japan. Central authorities enter the foreign exchange market for several reasons:to strengthen or weaken its own currency or to assist another central bank to do the same. to switch reserves from one currency to another. to smooth out any undesirable fluctuations in an exchange rate.

Corporation - the companies involved in international trade will enter the FX market to manage their cash flows. As a result of their international trade, these companies will be exposed to foreign exchange risk and will need to protect themselves against adverse movements in the FX market by hedging their positions. For example, Japanese companies are net exporters to the US and receive payment in US dollars. They naturally need to sell dollars against the yen and are therefore exposed to any weakening of the US dollar against the yen. Companies operating globally may also need to repatriate profits in other currencies to their base currency. For example, a company with its Head Office in London and subsidiaries in Europe and America may want to bring back its profits in euro and US dollars to its base currency, sterling, for balance sheet purposes. They will therefore need to buy sterling and sell euro and US dollars. Some companies have their own in-house dealing rooms and consequently will act as quasi-banks in the market; they will take on currency risk and will be involved in trading and speculating.

Fund managers are institutions or individuals that manage investment portfolios either for their own account or on behalf of their customers. When they invest in the international stock and bond markets, they will have a natural need to move from one currency to another. Investment flows also arise from fund managers switching economies.

Leveraged accounts are high net worth individuals (private customers), as well as institutions, that are involved in what is called margin trading. This allows them to speculate in amounts that are far larger than their available capital. They will need to post collateral (usually US Treasuries) with the bank in a blocked account. The bank would agree a leverage multiple which both sides find acceptable. For example, the multiple might be ten times. This means that the investor can post collateral of USD 10 million and can subsequently trade up to USD 100 million in the FX market.

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