What is a market maker?
A market maker is the counterpart to the client. The Market Maker does not
operate as an intermediary or trustee. A Market Maker performs the hedging
of its clients' positions according to its policy, which includes offsetting
various clients' positions, and hedging via liquidity providers (banks) and its
equity capital, at its discretion.
Who are the market makers in the Forex industry?
Banks, for example, or trading platforms (such as Easy-Forex™), who buy and
sell financial instruments “make the market”. That is contrary to
intermediaries, which represent clients, basing their income on commission.
Do market makers go against a client's position?
By definition, a market maker is the counterpart to all its clients' positions,
and always offers a two-sided quote (two rates: BUY and SELL). Therefore,
there is nothing personal between the market maker and the customer.
Generally, market makers regard all of the positions of their clients as a
whole. They offset between clients' opposite positions, and hedge their net
exposure according to their risk management policies and the guidelines of
regulatory authorities.
Do market makers and clients have a conflict of interest?
Market makers are not intermediaries, portfolio managers, or advisors, who
represent customers (while earning commission). Instead, they buy and sell
currencies to the customer, in this case the trader. By definition, the market
maker always provides a two-sided quote (the sell and the buy price), and
thus is indifferent in regards to the intention of the trader. Banks do that, as
do merchants in the markets, who both buy from, and sell to, their
Can a market maker influence market prices against a client’s position?
Definitely not, because the Forex market is the nearest thing to a “perfect
market” (as defined by economic theory) in which no single participant is
powerful enough to push prices in a specific direction. This is the biggest
market in the world today, with daily volumes reaching 3 trillion dollars. No
market maker is in a position to effectively manipulate the market.
What is the main source of earnings for Forex market makers?
The major source of earnings for market makers is the spread between the bid
and the ask prices. Easy-Forex™ Trading Platform, for instance, maintains
neutrality regarding the direction of any or all deals made by its traders; it
earns its income from the spread.
How do market makers manage their exposure?
The way most market makers hedge their exposure is to hedge in bulk. They
aggregate all client positions and pass some, or all, of their net risk to their
liquidity providers. Easy-Forex™, for example, hedges its exposure in this
fashion, in accordance with its risk management policy and legal
requirements.
For liquidity, Easy-Forex™ works in cooperation with world's leading banks
providing liquidity to the Forex industry: UBS (Switzerland) and RBS (Royal
Bank of Scotland).
