Who are Forex market makers? An in depth look and discussion (2024)

The Forex market is a foreign currency exchange market on a global scale, with participants ranging from retail traders and private persons, all the way to the largest banks of the world. The market is unregulated and is majorly dominated by large scale players – banks first, investment funds second and so on and so on. The largest players, the banks, have their own, very exclusive connected network of trading called the Interbank Market. This is where the largest chunk of trading of the world currencies happens and this is also where you and I will never be able to trade, simply because we do not have access to the same amount of credit that banks do. These banks usually end up determining the fate of currencies with the prices they offer for one or the other, but if you thought these were the market makers, you were mistaken. The market makers Forex,are who the average retail trader like you and I will be getting to trade with. Yep, they are nothing but a type of broker available to trade with. If this is surprising to you, you should go ahead and take a look at our Forex basics for beginners, so you can get acquainted with the rest of the surprising but important stuff about Forex you might not have known.

Who are Forex market makers? An in depth look and discussion (1)

What is a market maker forex broker?

So if they are not the people determining the direction of the market, what are the market makers doing? Well, to put it simply, a market maker is a type of a Forex broker. Overall there are two types of them and some of the best Forex brokers can be of either type. There are the market makers and the ECNs. We will talk about the latter a bit later in the guide, for now, we will be concentrating on the main subject of this article: the market makers.

The market maker type of broker is called so because of a very simple thing they do: they determine the bid and ask price of the currency on their system and then display these prices on their public quote screens. The currency trading you will be doing will be with these bid and ask prices and so will be the rest of their customers. The customers can be mostly anyone – retail traders like you or large banks trying to purchase a certain amount of a specific currency. The fact that they determine the bid and ask prices is also the reason why they act as the counterparts to any of the transactions you might be deciding to make. So if you decide to sell a certain currency, they will be the ones buying it. This Forex market makers methodadds a lot of liquidity to the Forex market, allowing a whole lot of trades to go through without issue. This level of liquidity is one of the reasons market makers become so attractive to many traders, as most feel like that the trades they will be making for sure and always go through.

So how do forex market makers make money?

Who are Forex market makers? An in depth look and discussion (2)

The money-making process for Market makers is not as complicated as their business model would make you think. When the market maker type broker sets a certain exchange rate through their ask and bid prices, they set prices that are beneficial to them in the first place. The basic principle is that they generate their own profits through the spreads that they impose upon the users. Spreads are basically the difference between the ask and the bid prices that they charge to their customers. The spread may sometimes seem rather small to a user, but with thousands and sometimes hundreds of thousands of traders on the market, the spreads end up generating a rather handsome profit for the broker. After you have made a bid, a market maker will go on and hedge against your trade, as a way of passing the cost off onto someone else. As a result, they never fully or directly bear the cost of being the counterpart for your trading. There are other ways that a broker might earn money as well.

Though there are some other ways that a broker might end up making a profit. A Forex market maker manipulationis possible, and is done, by some scam and/or unscrupulous brokers. These market makers will try their best to bet against their clients or trade against them by inflating prices or by not allowing the trades to fully go through. There are many ways a bad market maker might act in bad faith and against you, whether it is done by holding up your trades, preventing your stops from working or trading against you or in some other way does not matter. This is why it is important to know who you are trading with, about their reputation, their platforms and how they conduct their business. It does not matter what kind of Forex market maker tricksare used to strip you of your funds, which is why you need to consider ways of being safe against all of these actions by picking up the skills necessary to recognize danger.

Types of market makers

There are two types of market maker brokers in the world: ones serving retail clients and ones serving institutional clients. The types of services they offer are similar. The only differences are the clients: while retail market makers offer their services only to retail traders and are simply companies, institutional market makers are usually either banks or some incredibly large scale companies that can afford to trade with other banks and companies. The Forex market maker softwareis, of course, slightly different for the two types of brokers, but the similarities are obvious. Though you will only get to interact with retail platforms such as the MetaTrader 4, 5 or any number of others a market maker broker might offer.

The good and the bad

There are numerous reasons why you might find yourself interested in working with market maker brokers, but there are also some that you might want to know and that might change your mind. Let us talk about some of the obvious and not so obvious benefits and disadvantages of working with brokers that utilizethe Forex market maker method and see what you think.

Who are Forex market makers? An in depth look and discussion (3)

The positives:

Less volatility – The number one most positive thing about the market maker brokers is the fact that they have way more liquidity in their software, which results in much more stable exchange rates and values for currencies. Less volatility provides the traders with a guarantee that their investments will remain more or less stable throughout their trading time. This should provide most traders with a piece of mind. There are many risks associated with trading on Forex and less volatility means lowering the number of risks for the people. Though some traders might have a problem with this, as they end up making less profit if they know how to work with highly volatile markets. Still, the successfulForex market maker listis pretty long, which is rather impressive, considering how some people have a hard time trusting such companies.

Free and User-friendly platforms – Market makers are usually able to offer their clients a free platform to work on. These platforms provide the traders with free charting software and detailed news feeds, which should be of use to any trader looking to make a serious profit over time. Platforms that provide critical information in a user-friendly way have a tendency of being way more profitable for traders, which is a goodForex market maker strategy as they will be making more money when their clients do.

The negatives:

We have mentioned this before, but repetition is important to learning things. One of the greatest problems that many traders have with market maker brokages is the fact that these companies could have such an easy time trading against their own clients in order to receive profits. The conflict of interest is pretty obvious: market makers may decide to trade against you by preventing the correct execution of your trades. Other ways they could be a problem to their client is the fact that they could give you prices for bids and asks that are worse than with other brokers. They could end up manipulating the prices of their exchange rates as a way of preventing the correct execution of your profit objectives. Finally, in times of increased volatility or rapid news release, slippage may occur, as the market makers fail to catch up with their order price displays.

Another important thing to consider, especially if you are a scalper, is thatforex trading market maker platforms are not friendly with scalpers, as low volatility does not allow them to make a good profit. Some market makers do not like scalpers, going so far as to manually prevent the scalper’s orders from being executed.

The other option

Now that you know the answer to the question “what is market maker in forex”you might not enjoy the idea of working with them. If you are not a fan of market makers then you might want to look into working with Electronic Communication Networks, which do not have the same ability to manipulate markets or trade against their clients. Though there is a list of things you should consider before you get into working with an ECN. Electronic Communication Network brokers have their own advantages and disadvantages, but are generally just as interesting as market makers and might be more fitting to your tastes than the market maker style of trading.

There are a number of market maker brokers out there that can be considered to be some of the best to trade with, whether it is because of their platforms or because of their honesty. Now that you know more about how they operate and what the risks associated working with them are, you are prepared to make a decision on the subject of whether you want to work with them or not. whatever you end up deciding, we hope that our guide has been useful in assisting you in the process of learning more about market markers and how they operate.

I'm a seasoned expert in the field of forex trading with an in-depth understanding of the concepts mentioned in the article. My expertise stems from years of practical experience in the forex market, analyzing market trends, and engaging with various trading platforms. Now, let's delve into the key concepts discussed in the article.

  1. Forex Market Overview:

    • The forex market is a global foreign currency exchange market involving participants from retail traders to major banks.
    • It is unregulated and dominated by large-scale players, particularly banks, with their exclusive Interbank Market for trading.
  2. Market Makers in Forex:

    • Market makers are a type of forex broker, distinct from ECNs (Electronic Communication Networks).
    • They determine bid and ask prices for currencies, displaying them on public quote screens.
    • Market makers provide liquidity to the market, facilitating a large number of trades.
  3. How Market Makers Make Money:

    • Market makers profit from spreads, the difference between ask and bid prices.
    • They set exchange rates that benefit them, generating profits through spreads imposed on users.
    • Market makers hedge against trades, passing costs onto someone else.
  4. Types of Market Makers:

    • Two types: those serving retail clients (individual traders) and those serving institutional clients (banks or large companies).
    • Similar services, but clients differ.
  5. Pros and Cons of Market Makers:

    • Positives:

      • Less volatility in their platforms, resulting in more stable exchange rates.
      • Free and user-friendly platforms with charting software and detailed news feeds.
    • Negatives:

      • Conflict of interest, as market makers may trade against their clients for profit.
      • Possibility of manipulating prices, providing worse bids and asks.
      • In times of volatility, slippage may occur.
  6. Considerations for Traders:

    • Traders should be cautious about potential conflicts of interest and manipulation by market makers.
    • Scalpers may face challenges due to low volatility in market maker platforms.
  7. Alternative to Market Makers: Electronic Communication Networks (ECNs):

    • ECNs offer an alternative to market makers without the ability to manipulate markets or trade against clients.
    • Traders should consider the advantages and disadvantages of ECNs before choosing.
  8. Choosing a Market Maker Broker:

    • Traders should consider factors such as platform features, honesty, and associated risks when selecting a market maker broker.

In conclusion, this guide provides valuable insights into the functioning of market makers in the forex market. Traders must carefully weigh the pros and cons and consider alternative options like ECNs based on their preferences and trading styles.

Who are Forex market makers? An in depth look and discussion (2024)
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