A market maker is a financial company always ready to buy or sell a financial asset at an openly quoted price on a long-term basis. As the name suggests, these entities or individuals “make” the market tick by participating in transactions directly as either the seller or buyer.
A market maker typically does three things:
- Sets bid and ask prices within a certain currency pair.
- Commits to accepting these prices, with specifications (leverage, spread, etc).
- Market makers can hedge their orders to mitigate risk, but have a variety of options on how they approach orders.
An important function of a market maker is to provide liquidity, considered by most to be the pillar on which the forex market is built. They create opportunities for other market participants to buy or sell a fairly large range of stocks, currencies, futures and other trading instruments at an openly quoted price. Market maker transactions make up a significant portion of the total volume of forex trading, giving them influence on currency exchange rates.
A market maker aims to act as the counterplay, meaning they match buy and sell activity between their clients, typically only collecting profits through the spread.
The largest and best known market makers are known as Large Market Participants, which include: Deutsche Bank, Barclays Capital, UBS AG, etc. A bank’s share in overall trading volume is more important than its total capital in determining whether or not the bank is a market maker or not. In other words, what matters is a bank’s actual ability to influence movement on the market by offering its buy and sell prices. Even small and medium-sized financial companies can be forex market makers, but only the biggest market makers are known as Large Market Participants.
Exness is a market maker that offers partners and clients trading services in the financial markets. We recommend following the link if you would like to take a closer look at the forex market.