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The forex market has gained popularity over the last few years, and now it’s one of the largest financial markets across the world.
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The forex market is neither regulated whereby trading doesn’t occur on a given exchange, nor does it have a physical address.
The forex exchange transactions are done over-the-counter (OTC), whereby the involved parties agree to buy and sell from across the globe.
Moreover, the market is not centralized; thus, the exchange rate for any currency pair can vary between brokers.
Forex trading is merely a straightforward business. However, it’s a complex affair with the overall interaction of the various participating parties.
So, who is the forex market maker?
To get the answer to that question, first, it’s better to understand the players. The participants in the forex market are indeed a big bunch.
The major players are the world’s largest banks, which form an exclusive club (interbank market) whereby most activities of trading take place.
Retail traders, due to their inability to produce massive credit connections, are unable to access the interbank market.
However, that doesn’t mean that they can’t trade forex; they can do it via two broker types: Electronic Communications Network (ECN) and Market makers, and they are the market makers.
Role of Market Makers
Their primary role is simply as their name suggests – making the market. They “make” or merely set the bid and ask prices and display them to the public on their various quote screens.
They then make transactions at the prices with their clients ranging from retail traders to banks.
Therefore, by so doing, the market makers provide market liquidity, and as counterparties to every transaction in terms of pricing, they take the opposite side of a traders’ trade. This means that, whenever a trader sells, they buy, and vice versa.
The set exchange rates by the market makers are based mostly on their best interest, but purely on the supply and demand mechanism, and it’s through the spread that they get their profits.
The spread is always fixed by the market maker but kept fairly reasonable due to the completion of the market makers.
Most of them try to hedge or simply try to cover the trader’s order by passing it to another. They can also, at times, decide to hold the order and then trade against the trader.
Market makers don’t operate on a basis to predict the direction in which the price will move, or even try to push the market to a given direction.
Their main work is facilitating instantaneous transactions as per the quoted price without waiting for a counterparty, and thus provides a smooth flow of the price movement.
The advantage with the market makers is that the trading platform, in most cases, comes with free charting software as well as news feeds.
Also, some of them provide a more user-friendly platform. Another advantage is that the price movements of currencies can be less volatile when compared to those quoted on ECNs (can be disadvantageous to scalpers).
What about the Currency Market?
When it comes to a retail trader, the market maker is a forex broker. However, that can be different is the retail trader has an ECN account, but if not, the forex broker is the counterparty of all the transactions.
In cases whereby trades are between two banks or a large financial institution and a bank, the market maker is another bank or the institution.
The ECNs also serve as counterparties but operate on a settlement instead of a pricing basis.
The spreads vary on ECNs, depending on the trading activity of the currency pair. They make their money by charging fixed commissions for every transaction.
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The Bottom Line
Market makers have a huge role to play in forex trading as they have to provide liquidity as well as maintain a competitive bid-ask rate. A true market-maker “makes” the market.
With numerous market maker brokers in the field, the decision you make will be fatal as they impact significantly on your trading performance.
