What is a Market Maker?
To understand what is a Market Maker broker, suppose you want to invest in the Forex market, opening a long position of $1000 in the currency pair EUR/USD. In this case, as you wish to purchase, you must find someone willing to sell so that the transaction is complete. While this is a very liquid financial market, there may be times when you can not find anyone interested in selling the exact amount you want to buy (or buy the exact amount if you sell) at that time. It is here then where the Market Makers enters, as these are brokers that allow their customers to buy and sell on the market at any time.
A Market Maker is a bank or brokerage company that stands ready every second during the trading session to give a firm bid price (buy) and ask price (sell), so that the client (trader) can execute its orders anytime and open positions in the market in the desired volume. What the Market Maker do is to become the counterpart of the client in the transaction, meaning that literally is "creating the market" for the instrument the client wants to trade with, until it find another buyer/seller for this trade. For customers, this means that if you are looking to open a buy position, the Market Maker shall sell so that the transaction is completed, even if it has not an online vendor that makes the client counterpart. If, however, the client wants to sell, the Market Maker becomes the buyer, waiting for another investor interested. Thus, following the example given at the beginning, if we open a long position of $1000 in the EUR / USD, the Market Maker will sell that $ 1000 if at the time of the trade it was not found someone else to become our counterparts.
How the Market Makers Brokers make money?
The Market Makers seeking compensation for the risks they take, such as in the case of a hypothetical situation in which a trader sells 1000 shares of company X and the broker buys those shares and the market begins to fall shortly after. Imagine that this happens before the broker has been able to find a buyer for these actions, which could end up with losses. To prevent this, the Market Maker holds a fixed spread on each instrument (stock, currency pairs, commodities, etc.) with which it the transactions.
To understand how this works, we can continue with the example of the company X. Suppose that the Market Maker buys a thousand shares of Company X to trader for $ 100 each (ask price) and subsequently offered to a particular buyer at a price of $ 100.05 (bid price). The difference between the bid and the ask price is only $ 0.05 (the spread), but for a company that operates possibly many thousands or millions of shares a day, just with the spread the earnings can be quite significant. This mode of operation is also used by Market Makers brokers trading with other investment instruments such as currency pairs (Forex), commodities (gold, silver, oil, etc) and others.
Advantages of brokers Market Maker
- Most of the Market Maker brokers offer very complete trading platforms with advanced built-in graphics software and a service of market and economic news that is updated automatically.
- Normally the trading platforms of these companies are more user friendly than those offered by other types of brokers.
- The price movements in the investment instruments offered by these brokers are generally less volatile than the prices offered by ECN brokers or Non Dealing Desk brokers. However, for the scalpers this can be a disadvantage as they seek to take advantage of small variations in the quotes
Disadvantages of brokers Market Maker
- Because in some occasions these brokers can sometimes trade against the client, the Market Makers can present a clear conflict of interest in the execution of some orders.
- Sometimes the Market Makers offer worse bid/ask prices that those that a trader can get with an ECN broker and even with another Market Maker.
- For Market Makers is possible to manipulate the current prices of the instruments available to its clients, with the objetive to run the stops of these traders or impede their trades to reach their objectives for taking profits. For example, in some cases, the Market Makers in the Forex market can move the prices of currency pairs to 10-15 pips away from regular market price if they see that this is convenient to their interests. Of course this is not common practice in these companies, however if it occurs in brokers of dubious origin.
- This type of brokers can be prone to a high degree of slippage when are released relevant market news. During these periods of high volatility in the market, both the screen that displays the updated quotes and the system to place orders in the market can freeze avoiding the trader to open and close positions.
- Many Market Makers do not like the trading strategies based in scalping (some of these brokers even prohibit this practice) and have a tendency to put scalpers on "manual execution", which means their orders may not be executed at the price they want.
List of Market Makers Brokers
Below is a list of Market Maker brokers for the Forex market, which indicates whether or not regulated. Also, this list include a link which provides access to a comprehensive review of each of these companies, through where visitors can get information related to the various instruments and services offered and general conditions to trade in the market.
|Atlas Capital FX||Yes||Review|