Market Making in Currency Trade

Questions and answers about ‘market making’

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 easyMarkets, 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 customers. The relationship between the trader (the customer) and the market maker (the bank; the trading platform, easyMarkets etc.) is simply based on the fundamental market forces of supply and demand.

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 4 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. easyMarkets, 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. easyMarkets, for example, hedges its exposure in this fashion in accordance with its risk management policy and legal requirements.

For liquidity, easyMarkets works in cooperation with world’s leading banks providing liquidity to the Forex industry.

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