In short, whatever the type of customer (corporate, institutional or retail) and however they approach the market (single bank, multi-bank platform, inter-dealer broker, retail aggregator) it is almost always a bank on the other side of the trade. It is also virtually impossible to engage in a foreign exchange transaction without engaging with a bank directly or appointing one as agent.
One reason banks dominate is that foreign exchange means changing money, and only banks hold money in the conveniently exchangeable form of demand deposits. But it owes more to marsupial relationships between governments (which impose national currencies) and banks (which governments underwrite). Without national currencies, there is no need for foreign exchange.
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The only time banks take a serious risk in the foreign exchange markets is when they take positions in pursuit of speculative profits. One classic instance is short-selling a currency expected to devalue. Even then, their counterparties are likely as not central banks seeking to defend a particular parity, almost always with inadequate reserves, so the risk of loss is not large.
Other classic instances of position-taking include momentum trades (in which the bank bets that the weight of money will push a currency in a particular direction) and the carry trade. Carry trades vary, but all are ultimately bets that a higher-yielding currency will not depreciate enough against the lower-costing currency in which the trade is funded to offset the interest rate differential.
Position-taking is of course entirely voluntary. Indeed, it is not even necessary to be a bank to place bets on the direction of currency values. Hedge funds do it all the time. Nor is it necessary to be a bank to engage in arbitrage trading, where the trades are by definition riskless, since the dealer sells in the second market what is bought in the first.
The truth is that, in the foreign exchange market as in any other financial market, banks are almost always better informed than their counterparts. This information asymmetry, as economists describe it, is a principal reason why banks are able both to extract enormous profits from foreign exchange, and hardly ever make large losses.
