It is no secret to note that unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access.
At the top is the inter-bank market, which is made up of the largest investment banking firms.
Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle.
As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR).
This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread.
The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading).
The top-tier inter-bank market accounts for 53% of all transactions.
After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex and metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004)
In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs, however, the mere expectation or rumour of central bank intervention might be enough to stabilize a currency.
Apart from those giant players, there are the Non-bank foreign exchange companies which offer currency exchange and international payments to private individuals and companies.
These are also known as Foreign Exchange Brokers but are distinct from Forex Brokers as they do not offer speculative trading but currency exchange with payments. i.e. there is usually a physical delivery of currency to a bank account.
It is estimated that in the UK for example, 14% of currency transfers/payments are made via Foreign Exchange Companies.
These companies’ selling point is usually that they will offer better exchange rates or cheaper payments than the customer’s bank.
These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.