Forex Market Makers
Market Makers are brokers trading Forex, Commodities, Stocks and Indices by creating their own market. They are also called Dealing Desk Brokers (DD) or Agents.
What is a Market Maker Broker?
A Market Maker is a broker that creates a market within a market. A Market Maker takes always the opposite position than the position of a client. This means that when a client is opening a trading position instantly the broker becomes the counterparty.
◙ Client goes Long ↔ The Market Maker goes Short
◙ Client goes Short ↔ The Market Maker goes Long
Two Types of Market Maker Brokers
There are two types of Market Makers:
(1) Retail Market Makers Brokers (Financial companies dedicated to serving individual traders.)
(2) Institutional Market Makers (banks or large corporations offering bid/ask prices to their clients)
How a Market Maker Makes Profits
Market makers tend to stand in the middle between two opposite client orders and make money by charging a spread between the bid and ask price.
Client-A: Buys 100,000 Euro against USD at 1.2000
Client-B: Sells 100,000 Euro against USD at 1.2004
That’s it, the broker just made 4 pips / 100,000 USD, without any risk. Of course, sometimes a large client order may not get an equal-sized opposite position. In this case, the Market Maker is vulnerable to what is called the Market Risk.
Cost of Forex Trading with a Market Maker Broker
Market Makers charge no trading commissions, they charge only spreads.
(1) High spreads between ask and bid price.
These are the minimum spreads offered by Market Makers nowadays:
- EURUSD spread at 1.4 pips
- GBPUSD spread at 2.0 pips
- USDJPY spread at 1.8 pips
It is obvious that the above minimum spreads are considerably wider than the minimum spreads offered by ECN and STP Forex Brokers.
Advantages when Trading Forex with a Market Maker Broker
Here are some of the advantages when trading with Market Makers:
(1) Low minimum account requirements which are usually 100USD
(2) Welcome Bonus promotions, usually in the form of credit bonus but sometimes you may be able to withdraw the bonus capital
(3) Free Bonus Promotions, many brokers offer free bonus up to $100 which is ideal for beginners in order to test their skills in ‘Real’ market conditions
(4) Easy to use trading platforms (web-traders)
(5) Great selection of trading assets. Market Makers offer the wider asset index in the market especially as concerns stocks and indices
For many traders, trading against your broker isn’t a wise practice. For advanced and professional traders a market maker is not the best choice. Market Makers charge wide spreads and considerably delays during news releases. News trading or scalping using a Market Maker is simply out of the question. On the other hand, Market Makers consist of an ideal choice for beginners and semi-advanced traders. Easy platforms, wide asset selection, and very low minimum account requirements can prove very useful for non-experienced Forex Traders.
◙ What is a Market Maker Broker?