The Microstructure of Forex Market Speculation

There are more than 4 million retail traders worldwide and most of them are speculators. Although, retail speculators account only 3.5% of the total Forex market turnover, more than 90% of the aggregate market volume has speculative characteristics.

Currency speculation is a dynamic field that changes accordingly to the new fundamental or technical market conditions.


Defining the Forex Market Speculator

A Forex Market speculator is someone that trades Forex currencies in order to exploit short-term market inefficiencies. Speculators are willing to accept large risks by aiming to capitalize on quick and large gains. Most commonly speculators hold their positions no more than 15 minutes. After that time, they will probably take any profit or loss, and then, start all over again.

They are two general categories of Forex speculators:

(a) retail day-traders, and

(b) institutional speculators (majorly hedge funds)

Speculation Enhances the Market Depth and Market Liquidity

Many argue that the Forex market speculation works in favor of every other market participant (currency investors, importers, exporters, and tourists). This is happening as more speculation leads to increased market liquidity and higher market depth. In other words, increased speculation leads to higher market competition and narrower spreads between the ask and the bid prices.

The Creation of Extreme Volatility

Some others argue that speculation creates a volatile global economy, more vulnerable to the financial crisis. It also creates several problems regarding the implementation of monetary policies, especially as concerns developing economies holding limited Foreign exchange reserves.


Major Speculators in the Foreign Exchange Market

Foreign Exchange speculators include a wide range of market participants containing retail traders, bank dealers, Forex hedge funds, and others.

The Retail Speculators

Retail traders account for 3.5% of the overall Forex market turnover. Most retail traders are speculators (day-traders), and only a few are Forex investors. According to a recent ECB survey, this is the profile of the average retail trader:

  • The median age of 35, predominantly male
  • $6,600 on average deposit (US)
  • 84% believe that they can achieve positive monthly returns
  • 30% actually achieve positive monthly returns
  • Typical leverage 200:1 in Europe and UK, 50:1 in the US, 25:1 in Japan, and 20:1 in Hong-Kong

Breaking down Retail Traders:

There are more than 4 million retail traders around the globe:

  • 150,000 retail traders live in the USA
  • 1.4 million retail traders live in Europe
  • 1.6 million retail traders live in Asia

Retail Forex Brokers

85% of the global retail Forex market volume is traded through just 10 Forex brokers. These are the key Forex brokers for retail traders according to their market volumes (August 2016 data).

Table: Largest forex brokers by volume (August 2016 rankings)


Forex Broker




Saxo Bank









United States



Hot Forex




IG Group

United Kingdom



United States



GMO Click Securities

Hong Kong




United States



Interactive Brokers

United States



Direct FX




The Institutional Speculators

Institutional speculators include Forex hedge funds, Interbank dealers, and other professional traders who work for large investment firms. Most professional Forex speculators work for large banks, such as Citibank, JP Morgan, and UBS.

As concerns methods, institutional speculators trade mainly based on the economic conditions. They create specific economic patterns incorporating their anticipations regarding interest rates, employment, inflation, and growth. In addition, they seek for fundamental changes in the economy that may expand or shrink the availability of business opportunities as a good reason to buy or to sell a domestic currency.

The institutional speculators run their profits and get out of the market based on economic indications. Such economic signals may include:

  • lower growth potentials in the economy
  • the end of economic stimulus programs
  • lower business opportunities due to new political or social conditions
  • increased government regulation

The trading actions of small professional speculators are mainly based on other larger speculators.

And as Wall street says: “In the trading industry 5% knows what it is doing, 15% follows the 5%, and the rest 80% has a difficult time”

Key Banks in the Currency Market

According to the annual survey of Euromoney, these are the key players/banks in the currency market (ranked by market share %):

  • Citigroup (12.91%)
  • JP Morgan (8.77%)
  • UBS -Union Bank of Switzerland (8.76%)
  • Deutsche Bank (7.86%)
  • Bank of America Merrill Lynch (6.40%)
  • Barclays (5.67%)
  • Goldman Sachs (4.65%)
  • HSBC (4.56%)
  • XTX Markets (3.87%)
  • Morgan Stanley (3.19%)

The market share of the top five banks has decreased to 44.7% of the overall market volume. This is a continuation of a decline that has started in 2009 (peak of 61.5%).


Different Approaches to Forex Market Speculation

The practices of retail speculators differ significantly from those of institutional speculators.

(A) Retail Speculation

Most retail speculators are building day-trading systems based on technical analysis. These systems usually involve three different strategies:

(1) Breakout Speculation

Breakout traders anticipate that the market will make a substantial swing after breaking a key price level (using such tools as historical support and resistance levels or trendlines)

(2) Following Mid-Term Trends

These types of traders are entering mid-term trends after the market has corrected (using tools such as Elliott waves and Harmonic Patterns).

(3) Price-Reversal Speculation

They enter the market after an extended trend, targeting a short-term price reversal (using tools such as RSI, MACD, and Fibonacci).

(4) News-Trading Speculation

They trade key fundamental changes in the Forex market using an economic calendar. They open ECN accounts as they need minimal delays and tight slippage on order execution.

(B) Institutional Speculation

The key institutional speculators focus on fundamental analysis and especially as concerns interest rates, inflation, employment, and productivity growth. They are also focusing on the periodic releases of several economic institutions.

Institutional speculators use the release of any economic data as a piece of information that forms long-term economic patterns. These patterns will be used for forecasting:

(i) the upcoming market sentiment

(ii) the key trends of currency pairs

The institutional speculators use also technical analysis in order to time better their trading decisions (enter/exit the market).



Final Thoughts –The Amorality of Market Speculation

Speculation is neither a blessing nor an action of evil. It is a common practice that includes several advantages and disadvantages for the trading industry and the global economy. Forex speculators have no intention to punish a nation or to create problems in the global economy, their only intention is to make quick profits. Speculators indeed increase the general volatility of the global markets. In addition, retail speculators usually accept irrational risks, and because of that, they are losing money in the long-run.

On the other hand, speculation enhances significantly the market competition, market depth, and market liquidity. In other words, speculation leads to narrower spreads between ask and bid, and that works in favor of every market participant. Moreover, we may say that speculators create a respectable number of jobs in the financial industry. As concerns taxation, speculation leads to increased government revenues from the transaction taxes and from some forms of income taxes.

The advantages and disadvantages of market speculation can be summarized as:

□ Positive Effect from Enhanced Market Competition – Negative Impact due to the Increased Market Volatility

Will our world be better without any financial speculation? I dare to say no.


The Microstructure of Forex Market Speculation

By G. Protonotarios (c) 2017


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