HFM information and reviews
HFM
96%
Octa information and reviews
Octa
94%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%

What is a market maker?


Novice traders, once in the arena of the foreign exchange market, rarely thinks about who they are buying a particular trading asset from. Much more important for them is the quality and effectiveness of the trading platform, customer support and the reliability of the broker as a whole. The rest is usually the details. But it is precisely these details that are important, because the success of a particular transaction directly depends on who pulls the strings of financial market participants. Market makers - what are they? Let’s try to sort it out.

Literally, a “market maker” is a financial institution which “makes the market”. Of course, it’s quite difficult to imagine, but the principle of action of market makers is still quite clear - these are organizations that create and influence market sentiment.

According to the classics, market makers are financial organizations that provide liquidity in the currency, stock, spot and other financial markets. And although, for example, the Forex market is decentralized, all its participants are somehow interconnected.

It is no secret that to enter the interbank market for speculative operations, a person (or organization) will need to use the services of intermediaries. Why? Because the funds needed to place a transaction are quite huge. Hence the search for a broker, which is ready to provide a trading platform for use on loyal terms, is necessary.

The broker, in turn, turns to market makers, or liquidity providers, for help, withdrawing customer transactions to the interbank market. Thus, the brokerage company does not risk its own funds.

The work of the market maker and its main tasks


Before we start talking about the main tasks of market makers, it is worth voicing financial organizations that play the role of liquidity providers:

In fact, anyone who has impressive funds that can significantly stir up the financial market can act as a market maker.

So, the main activity of market makers is the mediation between participants in the financial market.


The main tasks of a market maker are as follows:

Speaking of the last point. A real market maker must sign an agreement with the exchange or a brokerage company, according to the terms of which the liquidity of a particular asset will be supported. That is why large brokers do not hide the “names” of liquidity providers with which they interact, and the more eminent they are, the more trust the broker inspires. But this is in an ideal world, of course. In fact, ordinary brokers are reluctant to disclose such information and are increasingly giving phrases of this kind: "Data is not disclosed." This is a disturbing bell, no doubt.

Now about the details of their functioning. Market makers have the responsibility to buy and sell assets on Ask and Bid orders. Moreover, the market is not always turned towards the data of market participants, but they have no choice but to place an order, because this is prescribed by agreement with a specific broker (exchange). Moreover, if there is no counter order, then the market maker must commit it at his own expense, waiting for the moment when, over time, there are market participants who want to purchase this order.

By the way, given the fact that market makers conclude agreements for the purchase or sale of foreign currency on their own funds, rumors appeared that these market participants are manipulating asset prices. The truth is only partial. The fact is that banks-market makers are the first to know about the advantage in the bear market or vice versa – bull market, because they can view current orders from customers. And having this information, they perform speculative operations in the market in the event that the volume of assets is sharply reduced. And therefore, they act as price stabilizers in the market, not allowing chaos to disperse with incredible progression.

How does a market maker make money?


The main source of “food” for the market maker is price fluctuations. The thing is that these participants in the financial market are more aware of its moods and the situation as a whole than, say, ordinary traders and therefore they have trump cards in their hands - they can more accurately predict how the price of an asset will behave: continue to move in its current direction or make a U-turn.

However, at any time on the market, market makers get their profit (the so-called dealing spread), otherwise no one would work at a loss. Even during periods of lull in the financial markets (regardless of what type of market it is in particular), earnings drip into the pocket of a market maker, albeit not in a huge amount.

Well, do not forget about hedging positions. When buying a large batch of a certain financial asset, futures for example, it will certainly open a position for sale in the spot market. Thus, as a rule, it turns out “fat” or at least the market maker goes to zero. But they certainly do not remain at a loss.

In addition to the above said, the profit of market makers is the reward they receive from the exchanges with which they have concluded an agreement. So to speak, for maintaining order in the financial market.

Interaction with market users


All participants of the financial market can be divided into two major categories: market makers, about which we actually talk now about market users.

So, if everything is more or less clear with market makers, as we grasped earlier - these are large financial organizations that have committed themselves to ensure the liquidity of trading assets, we did not say anything about market users.

Market users are also financial institutions, but smaller ones that actually send requests for the value of currencies and other assets in the markets. Thus, these are all other market participants.

If we talk about the process of interaction between these two categories of market participants in a more simplified way, the situation is as follows: market makers set quotes for smaller organizations (banks, brokers), while they, as market users, accept them or reject them. Thus, market makers quote the price - make price, and market users take the price or reject the price.

The largest global market makers


According to Reuters, one of the world's largest international financial news agencies, the Top 10 largest forex market makers are:

Note that each market has its own major market makers and each brokerage company has (or at least should have) an agreement to interact with specific market makers. The above large organizations also include the following: Mizuho Bank, PBS, Citi Bank, Chase Manhattan Bank, Union Bank of Switzerland and a range of others.

In general, much depends on a particular trading asset. For example, when working with a currency pair, which includes the Pound, the Barclays Capital is the largest market maker. Whereas when working with a USD/CHF pair, the major financial banks not only from the USA, but also from Switzerland, namely, Credit Suisse Bank and Union Bank, are the market makers.

Author: Kate Solano, Forex-Ratings.com

Share: Tweet this or Share on Facebook


Related

How does interest rate affect currency rates? How to make money on interest rate changes?
How does interest rate affect currency rates? How to make money on interest rate changes?

How do you predict the currency exchange rate when interest rates change? Can an ordinary trader make money off it? Octa analysts explain in the article.

Is it Easy to Learn Forex? A Comprehensive Guide to Mastering Forex Trading
Is it Easy to Learn Forex? A Comprehensive Guide to Mastering Forex Trading

Forex trading is a popular and potentially lucrative way to earn both active and passive income. However, it's essential to understand that learning forex is an ongoing process that doesn't depend on whether...

Exploring the Trustworthiness of Forex Trading: What You Need to Know
Exploring the Trustworthiness of Forex Trading: What You Need to Know

Forex trading is indeed a legitimate and trustworthy way to engage in financial markets and potentially reap profits. However, it exists within a complex industry where both rewards and risks can be exceedingly high...

Beginner's Guide to Forex Trading with FXTM
Beginner's Guide to Forex Trading with FXTM

If you're new to the world of forex trading and looking to embark on your trading journey, you've come to the right place. Forex trading can seem complex at first, but with the right guidance...

Common Mistakes Made by Novice Traders and How to Steer Clear of Them
Common Mistakes Made by Novice Traders and How to Steer Clear of Them

Trading in the financial markets is a realm that beckons many, but it is fraught with challenges that often go underestimated by novice traders. A lack of profound understanding of market intricacies...

Demystifying Stock Exchanges: The Heart of Financial Markets
Demystifying Stock Exchanges: The Heart of Financial Markets

Understanding the inner workings of stock exchanges is crucial for traders and investors. These financial powerhouses are more than just platforms for trading...

MultiBank Group information and reviews
MultiBank Group
84%
XM information and reviews
XM
82%
FP Markets information and reviews
FP Markets
81%
FXTM information and reviews
FXTM
80%
AMarkets information and reviews
AMarkets
79%
BlackBull information and reviews
BlackBull
78%

© 2006-2024 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.