What are Market Makers in Forex Trading

Market makers make or set both the bid and the ask prices on their systems and display them publicly on their quote screens. A market maker provides liquidity for a particular currency pair and stands ready to buy or sell that currency by displaying a bid and offer price. A market maker takes the opposite side of your trade and has the option of holding that position or partially or fully offsetting it with other dealers, managing their aggregate exposure to the market. Market makers earn their commission from the spread between the bid and offer price.

The exchange rates that market makers set are based on their own best interests. On paper, the way market makers generate profits for the company through their market-making activities is with the spread that is charged to their customers. Read more about forex spreads here. Usually, spreads are kept fairly reasonable as a result of the stiff competition between numerous market makers. As counter parties, many of them will then try to hedge, or cover, your order by passing it on to someone else. But there are also times in which market makers may decide to hold your order and trade against you.

There are two main types of market makers: retail and institutional. Institutional market makers can be banks or other large corporations who usually offer a bid/ask quote to other banks, institutions, ECNs, or even retail market makers. Retail market makers are usually companies dedicated to offering retail forex trading services to individual traders.

Pros:

  • The trading platform usually comes with free charting software and news feeds.
  • Some of them have more user-friendly trading platforms.
  • Currency price movements can be less volatile compared to currency prices quoted on ECNs, although this can be a disadvantage to scalpers.

Cons:

  • Because they may trade against you, market makers can present a clear conflict of interest in order execution.
  • They may display worse bid/ask prices than what you could get from another market maker or ECN.
  • It is possible for market makers to manipulate currency prices to run their customers’ stops or not let customers’ trades reach profit objectives. Market makers may also move their currency quotes 10-15 pips away from other market rates.
  • A huge amount of slippage can occur when news is released. Market makers’ quote display and order placing systems may also “freeze” during times of high market volatility.
  • Many market makers frown on scalping practices and have a tendency to put scalpers on “manual execution”, which means their orders may not get filled at the prices they want.