A market maker is a company which is always ready to purchase ad sell financial assets with a long-term fixed and clear price. Such companies get involved in deals directly as a seller or purchaser and widely specify the sale or purchase prices of trading instruments. The main role of a market maker is to provide liquidity and create opportunities for other market players to legitimately purchase a large package of stocks, currencies, futures, and any other trading instruments and sell the same with a clear fixed price. Market makers also risk their money because they are the other party to any deal. They always play a role in setting several strategies to ensure hedging against risks.show more
Forex market makers are large financial companies and banks. Their deals constitute a large part of total trading size in the forex market. Thus, such companies are able to influence exchange rates. Large international banks which trade currencies in amount of tenths of billions of US dollars are usually referred to as market makers.
The following institutions are one of the largest market makers: Deutsche Bank, Barclays Bank, UBS AG, etc. When specifying whether or not a bank is a market maker, the bank’s market share will be more important than total capital. In other words, the market share is measured by the bank’s ability to influence the market trends through offering its sale and purchase prices. SMEs may be also a forex market maker.
Like other currency traders, a market maker desires to have access to financial information (i.e prices, interest rates, etc) at a reasonable time. Such information can be obtained from high-speed means of communications such as official news agencies and trading platforms worldwide.
Market makers also need a sufficient capital to fulfill their obligations towards clients. A market maker must allow the clients to purchase a financial instrument and sell it with a reasonable price at any time.
Market makers usually reduce the risks by signing contracts with large market makers or brokers. Accordingly, clients can be redirected towards a interbank transaction market, if required.
In this context, forex service companies should provide the state of the art trading instruments to the clients. Online trading platforms are currently widely used (including web platforms) because online work is increasingly demanded.
Trading platforms are software that allows you to have access to updated information on the changes in the exchange rates of trading instruments and provides offers for purchasing or selling a specific quantity of selected instruments. Many trading platforms provide a number of additional options that facilitate the analysis of market positions and predict future trends using indicators and any other tools.
A market maker usually receives specific prices of any financial instrument from several sources such as large banks. Such information is analyzed taking into consideration any important economic or political factors, orders given by other market maker’s clients, and market maker’s desire to make profits. This analysis specifies the price offered by a market maker to a client. It is necessary to understand the main principles of pricing because a market maker provides a client with the price of a deal in time. In other words, a market maker specifies its price based on the prices offered by other companies and the clients’ orders. It should be noted that this price may be different from other prices given by other market makers.
Market maker collects the prices from several large European banks and continuously analyzes the clients’ orders. It uses general information about banks’ prices and size of client’s order relating to all trading instruments in the Company. Market maker can provide its clients with the best prices (i.e the differences between prices of main currency pairs). The Company can also reduce the differences between prices without exposing to any risks included in the instruments which are subject to many coverage positions.
Simply, market makers make profits through purchasing all trading instruments with low prices and selling the same with high prices.
This can be achieved if the sale and purchase price of any financial instrument is managed very accurately.
A market maker quite specifies the sale and purchase prices which are provided by liquidity suppliers in order to make profits.
A market maker simultaneously analyses the coverage positions to provide the best conditions to its clients. Generally, a market maker makes the profits through price differences (i.e difference between sale price and purchase price).
Market makers encounter high risks daily. They can’t know how the prices of financial instruments change and how the rates of such instruments change accordingly. There is always a probability that the more a market maker incurs losses the more it wouldn’t be able to fulfill its obligations towards its clients.
Here is a simple example.
A trader purchased 100000 euro from a market maker against USD 125000. This means that a trader can open one share position to purchase Euro/USD with an exchange rate of 1.25000 due to economic and political factors. The exchange rate of Euro/USD was 1.30000 two days later. If a trader sold 100000 euro to a market maker with the new exchange rate, a trader would receive 130000 dollars with a profit of USD 5000. A market wouldn’t have any option but repurchasing Euro with the new exchange rate.
What if dozens, hundreds, or thousands of traders make the same or similar deals? A market maker must have a sufficient capital to fulfill these requirements and pay the profits to its clients. Therefore, market makers protect the clients’ deals to protect themselves.
Let us understand how this is achieved. All clients’ positions are classified or summarized as per an instrument, size, and trend (purchase/sale). The positions (sale and purchase positions at a size equal to the same instrument or even the same main currency) shall be covered. No additional protected deals will be (indeed) needed. Why not coverage centers don’t cover the deals which balance themselves well?
For example, a trader can purchase a share of GBP / USD while another trader sells a share of GBP/USD. Whatever the exchange rate, the loss of either trader will cover the profits of the other trader.
This is called protected deals where a market maker uses a package of positions to cancel another package of corresponding positions.
If the size of selling or purchasing an instrument is higher than the size of compensation for specific reasons, a market maker opens a position with a larger market player. This position will be in the same direction as total positions registered with the register. However, such registered positions would be equal to the difference between these positions and coverage positions. As a larger market player owns a larger capital, this market player can bear the risks of corresponding exchange rates. Thus, a market maker can give profits to its clients through redirecting total positions to the interbank market.
With the following example, you will understand the works performed by a market maker to protect the clients’ positions, if required.
Let us say that a client has a comprehensive opened position to purchase USD with 234 shares and a comprehensive sale position with 112 shares. The purchase position is 122 share higher than the sale position. Accordingly, a market maker can open a position to purchase 122 shares of USD in order to cover the risks of gross sudden change to the exchange rate of this instrument. If the exchange rate of USD extremely rises now, the market maker’s clients will ensure that they will receive profits from the revenues the market maker achieves from its position.
Large trades are protected in the same manner. A market maker can use protected deals, if required, to secure the individual deals of some traders.
In this volatile market, market maker uses the interbank transaction market to protect the individual and total positions. market maker also analyses total sale and purchase positions of instruments at least three times per hour. Based on synchronous data, our system will automatically protect the positions, if required.
To select a forex market maker, it is necessary to take the following into consideration:
Reliability is one of the most important features of any organization.
One of things that prove the reliability of any company is the duration of its experience in the market. A reliable broker knows well the value of long history of a company and good reputation and enhances the client’s trust in a company.
A trustworthy market maker is licensed by a recognized market regulator.
One of other indications that prove the company’s efficiency is the quality of its website design, easy browse, and high-quality online services. In addition, a reliable company admits its mistakes quickly and never neglect correcting the clients’ affairs.
Finally, feedbacks given from other traders (through the internet) can provide us with very important information. Although it is necessary to think carefully before dealing with any company which receives negative feedbacks from online forums, feedbacks taken from unknown sources are unreliable (some feedbacks are given by employees of competitive companies).
Conditions of Profitable Trading
Trades must achieve the maximum profits and include the least risks. The best way to achieve this result is to reduce the cost of trades and protect them. In other words, you should reduce the price differences and increase the leverage rate. Thus, the capital required to keep your positions opened will be decreased.
One of other factors that influence the profits is the quality of the execution of orders by your market maker. Your profits increase as the times of re-pricing and slips in executive price decreases. In addition, executing orders with high quality helps to manage the risks through protecting your trading strategy.
Distinguished Trading Services
Services provided by a market maker must satisfy the international standards. It should be noted that the best market makers use the state of the art technology and always provide their employees with high-quality training courses.
Suspected Brokers: What should be taken into consideration?
Some market makers use fraudulent ways to take extra gains from their clients. One of the main sources of income is almost their limitless ability to change the trading conditions in addition to abusive connection with the current market conditions.
You should note that fraudulent companies don’t breach law in these cases. Documents governing their relationships with their clients interpret and highlight each position which is an integral part of a trade or are in a form of mandatory conditions of partnership with these companies.