HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
XM information and reviews
XM
86%
NordFX information and reviews
NordFX
86%

What Is a Market Maker?


Tom Tragett   Written by Tom Tragett

Anyone who's generally familiar with trading has heard about buyers, sellers and brokers. But there's one type of market participant that often gets overlooked: market makers. If you want to do well in the trading world, you should learn who's running the financial markets and who stands in your way. In this guide, we'll cover everything from a broad definition to common myths and trading advice.

Anyone who's generally familiar with trading has heard about buyers, sellers and brokers. But there's one type of market participant that often gets overlooked: market makers.

If you want to do well in the trading world, you should learn who's running the financial markets and who stands in your way. In this guide, we'll cover everything from a broad definition to common myths and trading advice.

Market Maker Definition

Market makers are also referred to as liquidity providers, which vaguely explains what they do. Market makers are usually large banks or financial institutions that keep the market functional by infusing liquidity. In simple terms, they ensure financial assets can easily become 'usable' money. If you want to sell an asset, they're there to buy it. If you're going to buy an asset, they can sell it. In turn, they take a commission in the form of the bid-ask spread.

Market making is prevalent in currency exchange, where the participants tend to be banks and foreign exchange trading firms. In theory, an individual can also 'make a market', but the size of the investments needed is a huge hindrance. It takes enormous funds to be able to always stand at the ready to buy or sell.

Example of a Market Maker: Say the current market price of EUR/USD is $1.05. Suddenly, there's news indicating that the EUR is going to rise. This should prompt individual traders to place market orders at $1.05. However, there will likely be an influx of buy orders at some point. A market maker, anticipating this behaviour, sets the price at $1.10. Because of the high number of market orders, the market price may rise, let's say, to $1.15, and because of demand, fall back to $1.12. A market maker will then sell their EUR/USD inventory to meet peak demand at $1.15 and restock it when it drops to $1.12.

Types of Market Makers

We can distinguish three types of market makers by their specialisation: retail, institutional and wholesale.

How Do Market Makers Work?

Market makers control how many asset units (stock, currency, etc.) are available for the market. Based on the current supply and demand of said asset, they adjust the price. They provide liquidity for the order book by placing orders that can be matched in the future. Then, market takers (traders, for example) consume the inventory by taking the order from the order book.

Market makers are known to hold a disproportionately large number of assets. The reason why is they need to be ready for a high volume of orders in a short time at competitive pricing. If investors are buying, they're supposed to keep selling, and vice versa. They take the opposite side of trades being executed at any given time, i.e., acting as a counterparty.

Each market has its own market makers, which means that each broker uses a quote given by one or several market makers when offering prices to clients.

What Is the Role of a Market Maker?

To better understand what a market maker does, it's worth looking into the functions they perform in the market.

Intermediation

By intermediary function, we mean several ways of intervening in the market:

How Do Market Makers Make Money?

Market making is associated with risk brought over to trading books. To compensate for that risk, a market maker charges a fee in the form of commissions or the spread. Unlike traders, a market maker doesn't raise money by buying low or selling high.

Let's look closely at the two most important sources of market-making:

How Do Market Makers Make Money?

How Do Market Makers Make Money?

How to Become a Market Maker

Anyone can become a market maker/liquidity provider if they meet the requirements. The catch is that it's practically impossible for a regular person to perform minimum trading functions. More commonly, only a large institution can sustain the required volume of trading.

But if you're interested in the process of becoming a dedicated market maker, here's how it goes:

  1. Verify eligibility and become familiar with exchange expectations.
  2. Complete all necessary paperwork to get a market maker permit.
  3. Apply to authorised exchange staff.
  4. Provide proof for Guaranteed Minimum Fill for eligible orders.
  5. Wait for the solicitation and approval process.

If we look at the topic more broadly, we can disregard the official "market maker" title. In essence, any participant with a significant share of operational volume makes the market in a way.

Advantages and Disadvantages of Market Making

The advantages of the market maker concept are exciting for smaller accounts and private investors. As for disadvantages, they're primarily applicable to advanced traders.

Advantages

Disadvantages

Market Maker vs Broker

Let's avoid confusing market makers with brokers because they seem similar in many ways. The table below compares the two.

Market Maker

Broker

Acts as a source of liquidity for exchange-traded assets

Facilitates selling an asset to a seller and purchasing for a buyer

Large banks or financial institutions

Individuals or firms

Heavily influences the market

Doesn't have a direct effect on the market

Charges spreads between the price that traders receive and the one the market sets

Charges fees and commissions

Has deep market insight (an advance look at all incoming orders)

Possesses the same information as the rest of the market

Doesn't work for clients; instead, they create a market for investors

Provides services for clients (consulting research, investment advice)

List of the Largest Market Makers

Below is the list of market makers that are considered the largest in the world. Bear in mind that it's hard to compile their exact rating, but here are the companies that are worth traders' attention.

Myths About Market Makers

Most of us have heard the assumption that the market is manipulated by some power driving prices in whatever direction they need. If these claims come from newbies, it makes sense. However, blaming all losses on shadowy puppeteers can quickly become detrimental. Below are several myths that we can clarify.

Why Should Traders and Investors Be Aware of Market Making?

Market makers have a significant impact on the market and, hence, your trading success. Here's how you can use that to your advantage.

Conclusion

It's undeniable that the market maker's role is technically difficult but has real value for the market and exchanges. These participants must commit to maintaining fair prices for different types of assets and covering demand at any time. You may not have known it before, but market makers have always been present in financial markets. Otherwise, large-volume orders would only be executed with long delays, making trading impossible.

To get started on the right note, sign up for a demo account at Libertex. You can use it to practice and master your strategy in a simulated market.

When you upgrade to a live account, you'll already be accustomed to how the market works and make sound decisions. And thanks to market makers and our platform, you can open positions within a matter of seconds.But please note that trading CFDs with a multiplier can be risky and lead to losing all of your invested capital.

FAQ

Finally, here's a quick round-up for this topic.

#source


RELATED

Cryptocurrency Trading for Beginners: Best Strategies and Patterns

Today, there are almost 19 thousand cryptocurrencies in the world. On the one hand, this is a huge opportunity! For comparison, only a few thousand companies...

Choosing a trading instrument: how to trade stocks and CFDs on stocks

We continue our series of articles on choosing a trading instrument. This time you will learn what CFDs on stocks are, how to trade them and how such...

ETF vs Index Fund: Similarities and Differences

Wondering what is the difference between ETFs and index funds? This article explains that and more, including what to look out for when choosing between them. Index funds and ETFs...

MT4 Web Trading to trade Forex directly from your browser

The MetaTrader 4 (MT4) trading platform offers almost everything a trader needs for forex trading. Its powerful trading and analysis tools are what have earned the platform...

Regulators Affecting the US Dollar

The value of the US Dollar can be affected by a number of different factors, such as the Central Regulator, also known as The Federal Reserve. The Central Bank...

Mastering the Art of CFD Trading: A Comprehensive Guide

Contracts for Difference (CFD) trading is rapidly evolving as one of the most sought-after instruments in the financial market. Its flexibility across various market sectors...

Selecting Signals in Copy Trading

A few simple tips on how to choose profitable signals for a subscription in Copy Trading, and not to lose your money. These recommendations are also suitable for PAMM accounts...

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...

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.

What are derivatives in finance?

When referring to derivatives, it is about financial agreement that establishes a value through the value of an underlying asset. This means that they have no value...

TOP8 Mistakes Forex Newbies Make

We all can be wrong from time to time. It's a common thing for the people who would like to gain experience in any area of life. There are no actions without mistakes...

Gold Trading Online: Everything you Need to Know

Gold is considered a popular precious metal and is also the earliest mined metal in the world. It is believed to have originated from space debris and not from planet Earth...

Which is the Best Online Trading Platform for Beginners?

If you are new to forex trading, then you must probably be looking for the best trading platform which is usually selected based on top-notch tools and resources...

Forex: perfect source of first income for the youth

In today’s fast-paced digital world, young people seek new avenues to earn income and gain financial independence. Among the options available, Forex trading stands...

What trading animals do you find in the stock market?

We bet you watched Wolf of the Wall Street with Leonardo DiCaprio playing Jordan Belfort. Have you ever wondered why the main character was referred to as a wolf?

Relative Strength Index (RSI): Unveiling Price Momentum and Overbought/Oversold Conditions

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. Developed by J. Welles Wilder, RSI ranges from 0 to 100...

Risk Management on Forex: Basic Rules

Senior traders would say that there is no chance to build a successful career without risk management. Whatever your trade duration is, the trade should...

MetaTrader4 vs. MetaTrader5

A trading platform is basically a workspace for traders, their work environment. The quality of trading depends on its functionality and convenience. Many market...

The Ultimate Guide To Stock Investing For Complete Beginners

There`s hardly a single person today who has heard about the passive income that investing can consistently bring in. There are many examples: from the great financiers...

MetaTrader 4 (MT4): A Comprehensive Guide

MetaTrader 4, an offering from MetaQuotes Software Corporation, has firmly rooted itself in the world of foreign exchange trading. It has become an iconic platform...

Vantage information and reviews
Vantage
85%
FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 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.