Who are market makers and how do they influence the quotes of the Forex market
In the classical definition, a market maker in exchange trading is a financial institution (firm) that undertakes to provide liquidity for a certain share on the exchange. These are mainly large banks, brokerage companies and dealing centers. A market maker is literally a “market maker”, he participates in the market process in order for the market to be viable. There are many market makers in the markets, and they are all professional participants in exchange trading. They work according to the rules of the exchange and in accordance with financial legislation. Market makers enter into agreements with exchanges where they undertake to provide liquidity for certain shares, futures, currencies. That is, they must buy and sell financial instruments even if there are no sellers or buyers. In addition, market makers bring buyers and sellers together, acting as an intermediary in transactions. By collecting buy and sell orders, market makers form prices.
Marker makers in the Forex market
Market makers have always existed since the days of exchanges. But with the advent of the international currency exchange (Forex) market, their importance has grown a lot. The volume of transactions in the Forex market is now over 5 trillion dollars. Market makers account for a significant part of operations. More than 50 percent of this turnover is provided by four European banks. These are the English RBS and Barclays, the German Deutsche Bank and the Swiss UBS. American banks Bank of America, Goldman Sachs, JP Morgan, Morgan Stanley have a relatively large share.
The cost of a standard contract in the Forex market is $ 5 million. It is clear that ordinary traders and many banks cannot operate with such amounts. Therefore, market makers collect smaller orders in the so-called “pool”. Large brokerage companies (prime brokers) submit applications to the pools. Prime brokers themselves accept orders over $ 10,000 from retail brokers, in which ordinary speculative traders trade.
Modern functions of market makers
If you divide the total trading volume by a standard contract, you get over a million transactions per day. Taking into account that the market is not active around the clock, up to a million contracts can be executed every hour. That is, there is complete liquidity in Forex. It turns out that in the modern foreign exchange market, the role of market makers has changed somewhat. Forex regulation applies to them as well. They make money mainly on the difference between the buy and sell prices when executing client orders. Market makers have the right to trade currencies at their own expense. Hence the rumors that they are moving prices at their own discretion. In fact, market makers buy and sell currencies only when the number of sellers or buyers has greatly decreased in the market due to some event. Thus, they stabilize prices and prevent chaos. But they sell the currency at a very high price (widening the spread), reducing demand, and buy at a low price, reducing the supply. In addition, the market maker immediately creates an opposite position or buys futures to prevent his own losses. That is, in fact, market makers do not move prices, but fulfill their main task of providing liquidity.