As a forex trader, you should know who a market maker is and why a market maker is important in the forex market.
In this article, I will be explaining who market makers are and why they are so important.
A market maker is a big financial institution that buys or sells a currency at a quoted price.
The U.S Security and Exchange Commission defines a market maker as a firm that stands ready to buy and sell on a regular continuous basis at a publicly quoted price.
It is a company that engages in two-sided trading by buying and selling currencies in the forex market.
Now, I will tell you what they do. Market makers provide price quotes for currencies.
They are responsible for continuous buying and selling in the forex market.
Also, they help to provide the bid-ask price.
Remember that the asking price is the price that the sellers are willing to sell.
The bid price is the price that the buyers are willing to buy?
However, market makers do not have an opinion on whether the price of a currency would rise or fall.
A market maker only buys and sells at a quoted price so as to make the market not become illiquid.
You should ask yourself how do market makers make a profit?
Market makers make a profit on the difference between the asking price and the bid price which is the spread.
Regardless of how small a spread is, market makers will make large profits. This is due to the volume of trades they engage in.
Lastly, the higher the spread, the higher the profit of a market maker.
The more market makers try to quote a currency, the narrower the spread becomes.
Importance Of A Market Maker.
The major importance of a market maker is to ensure the liquidity of a market.
They do so by ensuring that the volume of trades in a market is large enough such that other traders can execute trades easily in such a market.
Most market makers buy and sell currencies at the quoted price just to keep the market moving.
Remember that liquidity refers to how active a market is. It refers to the number of active traders in a market with their trading volume.
Let us take a very relatable example.
Assuming that you want to sell the Singapore Dollar during the European session.
Most traders might be busy buying and selling the Euro and Great Britain Pounds during this session.
Market makers can decide to buy from you at the current quoted price just to keep the Singapore Dollar market liquid.
Another importance of market makers is that they help to provide the bid-ask spread.
Just as I have said, they buy and sell when other traders are not buying and selling.
Therefore, they provide the asking price and bid price.
The higher the spread, the higher the profit of a market maker. A market maker makes a profit through the difference between the ask and bid price.
Also, the higher the number of market makers trying to quote a spread, the narrower the spread would become.
When market makers take a position on a currency, they take a risk.
Then, they try to hedge that risk by taking a position with another currency that traders trade actively at that moment.
Forex market makers include big banks, brokerage, firms, companies, and so on.
Frequently Asked Questions(FAQs).
The major role of a market maker is to provide liquidity in a market. Remember the liquidity refers to how active a market is.
Market makers make money through the difference between the asking price and the bid price which is a spread.
The asking price is the price that sellers are willing to sell.
The bid price is the price that buyers are willing to buy.
Once a spread is high, the profit of a market maker is high too.
Yes, it is legal.
However, market makers must follow the specific laws that a country’s regulatory bodies set to operate legally.
Also, the notable regulatory bodies in the U.S are the Security and Exchange Commission(SEC) and the Commodities Futures Trading Commission.
Some notable market-making firms include:
IMC Chicago, LLC.
Latour Trading, LLC.
SUMMARY – Who Is A Market Maker
A market maker is a firm that buys or sells currencies at publicly quoted prices.
Also, the major importance of market makers is that they help to provide liquidity in a forex market.
In addition, they help to provide the bid-ask spread.
They make money through spreads. The narrower the spread, the lesser their profit.
The wider the spread, the bigger the profit of a market maker.
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